Bull markets come and go, most end with a bang, a few with a whimper. The current one just happens to be the longest in history. This simply means that predicting the future of stock prices has never been more risky. Whenever you hear the expression, “this time it’s different”, you know that you will be embarrassed by any prediction.
The month of July is now in the history books. With better than a 2% gain; it was the second best month of 2017. And technology stocks with a 5%+ gain set the pace.
Remember just a few weeks ago tech stocks were tumbling. Market watchers were wondering if the bull market end was near or if a change of leadership was taking place. Suddenly tech stocks steamed ahead to new record highs.
Smitten With The FAANG
As FAANG stocks go, so goes the market. Collectively they account for 10.5% of the market weighted S&P 500 Index. This year the index has gained about 11%. Take out the FAANG stocks and you are left with a measly 1% increase. So you get the idea pretty quickly.
Critics of the market compare the current dependence on technology stocks with the dot.com bubble of 2000. There are similarities: record high stock prices, narrowness of investor focus, plenty of danger signs.
One thing stands out separating FAANG fever from Dot.com mania. FAANG companies not only have revenues and earnings, they have way above average growth. If you add the buzzwords, Artificial Intelligence and it is easy to get sucked into believing, this time it is different.
Handicapping The Horses
It was this combination that showed up in July including a supply of earnings reports that helps explain the FAANG recovery.
Netflix Wins By 8 Furlongs (A Mile)
Netflix revenues in the second quarter exceeded forecast growing 33%. The big surprise was the addition of 5.2 million new subscribers compared to estimates for 3.23 million. NFLX stock gained over 20% in July making it FAANG #1.
Facebook Was A Fast Philly
Analysts described Facebook Q2 results as “beating estimates with ease” that included a 69% increase in earnings. That is a huge gain for a company that has over 2 billion users worldwide. The pleasant surprise came from better that expected advertising revenues. Management keeps warning the street about a slowdown but so far it has not happened.
In return for a good quarter, the shares gained 12.5% in the quarter, second best of the group.
Apple Was No Nag
Apple stock had a pretty solid July gaining about 3.5% making it the third best performer in the FAANG. The stock has been on a tear this year gaining 30% even though the company is still highly dependent on the iPhone.
Q3 results are almost irrelevant in the sense that September is the time for iPhone 8 and the 10th anniversary of its first introduction. As the biggest weight in the S&P Index, AAPL will be one big key to the markets total performance going forward.
Alphabet: The Also Ran
Alphabet Q3 beat estimates both on revenues and earnings. The company paid it’s fine to the European Union in the quarter placing a drag in the reported number; otherwise advertising revenues drove the biz once again. The stock enjoyed a 2.5% gain in July and that is a bit better than average.
Bringing Up The Rear
Amazon is a something of a faith stock. You are a believer or you are not. In July, the non-believers held sway. The stock increased just about 2% making it only an average performer, the worst in the group.
Analysts greeted Q2 results with a thumbs down citing such problems as the rise in “negative unearned revenue”. Amazon’s accounting is complicated. Jeff Bezos doesn’t manage Amazon according Wall Streets standards for profit maximization. So if you are a believer, don’t try to understand the exact definition of negative unearned revenues.
Summer is more than half over and the market will soon focus on the most volatile period of the year. The treacherous months of September and October are coming up. But this time it’s going to be different.