Insights | October 31, 2017

FAANG SCHMAANG: Don’t Blame the Over-valuation of the S&P Solely on Information Technology

Executive Summary

A small group of technology stocks have recently delivered stellar returns. Facebook, Apple, Amazon, Netflix, and Alphabet (Google), the so-called “FAANG” stocks, are up 36% on average year to date through September 2017. This superlative performance, in such a narrow group of large cap names, has led many to raise questions about the current valuation of the S&P 500, its sector composition, and comparisons to other markets. These questions have included:

  • Do the old rules apply? The Information Technology (IT) sector, which has and deserves to trade at a higher multiple, is a larger part of the market today, so comparing today’s price multiples to history doesn’t make sense, right?
  • How can the market be expensive if no sector is trading at extreme valuations relative to its own history as measured by P/E 10 multiples?[1]
  • Isn’t the valuation gap of the U.S. vs. non-U.S. markets justified by the higher weight in IT in the U.S.?

We know that the higher weight in the relatively expensive IT sector is driving some of the expensiveness of the S&P 500, but this does not fully explain the bulk of its high absolute and relative valuation level. In this short note, we’ll try to address some of the questions asked above.

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