High-flying tech stocks succumb to gravity

The FAANGs may be losing their bite. The group of high-growth US technology giants – comprising Facebook, Amazon, Apple, Netflix and Google’s parent company Alphabet – has been driving the US bull market over the last few years. But a round of earnings reports and subsequent jitters have wiped 10% off the FANG+ index (which also includes major US-listed Chinese tech giants) in a week. A 10% drop is known as a “correction”; a 20% one constitutes a bear market. “These companies have defied gravity for multiple years and they are starting to come back to earth,” Michael Underhill of Capital Innovations told the Financial Times.

A record daily share-price fall 
It began when Facebook’s share price slumped by 24% last week, reducing the market value by $140bn, after the company warned that revenue growth and margins were slipping. Netflix narrowly missed subscriber growth estimates and paid the price with a 14% share-price fall.
The costliest plunge in one day so far occurred 25 years ago when American tobacco giant Philip Morris “dropped like a discarded ciggie”, says Ben Marlow in The Sunday Telegraph. A quarter of a century later this record has been surpassed by Facebook’s loss in value, “equivalent to the entire Argentine stockmarket”. Still, this is hardly the death knell for big tech. Facebook’s shares jumped by over 40% from the depths of its crisis over Cambridge Analytica, adding $230bn of stockmarket value. And the remaining FAANGs continue to outperform. Apple is still producing impressive results, while Amazon has delivered a $2.5bn (£1.9bn) quarterly profit. Alphabet also reported strong earnings growth and shrugged off a huge fine from the EU.
What the tech slump means for markets
The way the tech sector had been racing ahead of the rest of the market was “worryingly reminiscent of the dotcom bubble”, notes John Authers on FT.com. “That disappointing but not disastrous results could prompt such an extreme reaction suggests that valuations had grown wildly overhopeful”, just as we saw at the turn of the century.
If investors now take a less starry-eyed view of the market-leading tech giants, it could further reduce Wall Street’s upward potential. Earnings growth, juiced by the corporate tax cut, came in at 20% year-on-year in the second quarter, but the pace is slowing now that most of the one-off gains have passed through the system.
Interest rates are on the rise and the Federal Reserve is unwinding its QE programme, selling the bonds it bought with printed money. It is thus withdrawing liquidity from the system. Valuations are eye-wateringly high, with the cyclically adjusted price/earnings (Cape) ratio at 32. The only time the Cape has been higher was in 2000.
Finally, the current ceasefire in the trade dispute between Europe and America is good news, but the prospect of a trade war with China is yet another headwind for a bull market that has started to struggle.