The world's biggest tech stocks are at a crucial turning point. Here's why the next few months could determine the fate of the market.
- Facebook and Apple have jumped this week after their quarterly reports eased investors' minds. Like FAANG compatriots Amazon, Netflix and Alphabet, they suffered huge losses late last year.
- The stocks have surged over the last month, and it's a sign investors are putting some of their fears behind them and getting more optimistic about the US economy and the stock market.
- There are still signs technology stocks could struggle, and the FAANG group may never be as unified as it was over the past few years.
The world's biggest tech stocks are on the mend after a brutal three months, and it could be a good sign for the broader market.
Facebook is on track for its best day in two years after its fourth-quarter profit and revenue beat analyst estimates. That came two days after rallied following a quarterly report that was rough, but no worse than expected.
Facebook is up about 20% since the market hit its low point on Christmas Eve. Amazon has staged a similar rally and Netflix has soared 45% over that time.
While those stocks and FAANG compatriot Alphabet are all far from the highs they set earlier in 2018, their recent surge shows investor mindsets have changed dramatically in January from the month before.
"Growth expectations were very washed out and people were afraid the Fed would keep raising even in the face of weaker economic growth," said Sameer Samana, global equity strategist for the Wells Fargo Investment Institute.
Since December, the Federal Reserve has made it clear it's not in a hurry to raise interest rates further, and investors have become more optimistic about the health of the US and global economies and the state of US-China trade talks.
That's made them willing to go back to their FAANG favorites, which are unified by their links to consumer spending and economic growth as well as the increasing role of technology in peoples' lives.
But the medium- to long-term picture isn't quite so clear. Samana said an acronym-based trade like FAANG that attracts a lot of hype is eventually going to struggle to meet expectations over time.
For that reason - and because the broader market has taken its cues from tech for years - the future of the entire equity complex will likely hinge on what the sector does.
"It was a hot trade, it was a momentum trade, people were willing to overlook a lot," he said. "Each one of those companies will have their own trajectory going forward."
He added that while the future for technology companies still looks good, the stocks may not be able to dominate the market the way they did for the last few years. They've struggled for about six months, and so far, the tech industry's fourth-quarter profit and revenue growth look weaker than the broader S&P 500.
"This is one of the first quarters I can remember where tech has underperformed from a growth rate standpoint versus the rest of the market," Samana said.