The Nasdaq is basically flat year to date. All the FAANG stocks are near all time highs. Facebook, Netflix and Google all missed on EPS estimates. Apple is likely to be hit even worse (sales are down and stores are closed) which leaves Amazon as the only member of FAANG that is likely to beat on earnings. EDIT: NEVERMIND, AMAZON MISSED ON EPS TOO. Surprisingly Apple was the only beat but that’s because their estimates were low.
Here’s the thing… According to earnings calls and the current economic trend, they were only beginning to experience negative effects for the last few weeks of the quarter. GDP declined by 4.8% this quarter, whereas economists are projecting a decline of 30% to 40% next quarter.
If we look at tech across the board, we have some winners like Microsoft and Zoom, but chip makers like AMD (which met EPS estimates but didn’t beat) and Qualcom both delivered poor guidance for coming quarters. AMD has been rallying back to all time highs. Nvidia is also near all time highs. Yet, despite the relative strength in the tech sector, the current trend of earnings, economic forecasts and guidance (or lack thereof) strongly suggests that tech will take a huge hit in coming quarters.
Let’s look at how concentrated the S&P is in the very top stocks, all of which are tech… i.imgur.com/Gir5SXH.jpg This blows the dot com boom out of the water. Now consider how much of the S&P the rest of the tech stocks account for.
All of this is to say, watch these tech stocks closely. If they fall, the indexes will go with them. There is a high probability they will lead the next leg of the drop.
Also, here’s my take on the long term value of these stocks. The US is moving closer and closer towards adopting basic income. Nothing is guaranteed, but if anything has made the case for increased automation and basic income, it’s the current circumstance. Such a policy would likely necessitate a rise in corporate taxes or a VAT. That’s a direct hit to the earnings of notorious tax evaders like Amazon. In addition, basic income would give working class people more leverage in holding out for higher pay because they wouldn’t be weighing job offers against total destitution. This too would detract heavily from future earnings.
After the 2000 crash, the Nasdaq didn’t recover to the highs for 15 years. If you look at the S&P chart I posted, two of the top five stocks in 2000 were Microsoft and Intel. Microsoft took 16 years to recover to its highs and Intel never fully recovered.
Therefor, I advise extreme caution in this environment. Do not be shamed out of taking profits near all time highs if that’s what you personally feel comfortable with. I won’t say it’s wrong to hold if you’re ready to accept the risk, however, just because these companies are good “blue chips stocks” that doesn’t mean that they’re low risk or no risk, regardless of your time horizon. That’s just my two cents.