Pablo Pardo (Washington) | These companies are called the FAANG, the acronym which is fashionable on Wall Street for Facebook, Apple, Amazon, Netflix and Google. Another buzz word is MAG, similar to MAGA (Make America Great Again), popularised by Donald Trump during his electoral campaign. Since then it has become almost a war cry for his Twitter followers. MAG refers to Microsoft, Apple and Google. In total, these three companies account for 9.6% of the index’s capitalisation.
These figures show that the tech firms’ weighting in the US market is enormous. Bear in mind that we are talking about Standard and Poor’s (S&P), the index which is most on a par with the Ibex 35 (the Dow Jones is not really representative, although is still a favourite with part of the media), not the NASDAQ, which is dominated by the tech companies. The concentration of capitalisation in just a few stocks in S&P is extreme. This market has 3,800 companies registered with it, with a capitalisation of some $10 billion. The above-mentioned FAANG account for no more and no less than 24.5% of this total.
So what does all this mean? Simply that the US market is moved by just a few stocks. Amazon and Alphabet (Google’s parent Company)’s share prices took off on the back of their first quarter results, while the value of Apple’s stock saw a spectacular rise after Berkshire Hathaway increased its presence in the company (the so-called Buffett effect: when Warren Buffet buys shares in a firm the share price goes up. But even before all this happened, most of the much bragged about rise on Wall Street this year was fuelled by these five stocks. An analysis from consultancy firm Bianco Research shows that of the $1.19 billion which the S&P gained between April 1 and April 24, the FAANG contributed $392.000 million, namely, 32%. Apple alone contributed $140.000 million, 11.8%. And this was before the Buffett effect, and also prior to the announcement of a $50.000 million increase in Apple’s dividend.
All the above has a clear conclusion: a handful of tech companies – with Apple at the head – are the ones which are really moving Wall Street. As a matter of fact, it is a market which is entirely dominated by Apple. This is a bit of a paradox because the company managed by Tim Cook has not brought out any new product since the Apple Watch in 2015. And although this watch has become the biggest selling ‘wearable’ in the world, it’s contribution to the revenues of the tech giant from Palo Alto is relatively small. (A ‘wearable’ is a technological product which people wear, like bracelets which measures pulse rates and the failed Google glasses). In fact, Apple did not meet market consensus in the first quarter in terms of profits and iPhone sales, and it had to lower its forecasts for the second quarter.
No. The reason for Apple’s success is down to expectations. On the one hand, that its iPhone 8, due out in the autumn, will be an amazing success. With this product, it will celebrate the tenth anniversary of the launch of its first smartphone. And on the other, that Trump will succeed in going ahead with his tax reform, which includes “tax breaks” for companies which reptriate the capital they hold outside the US. If they bring this back to the US, the companies will only pay 10% instead of 39%. Apple has $256.800 billion in reserves, most of it overseas. It has never paid taxes on this in any country because the company has managed to remove this capital from the markets where it was generated and deposit it in tax havens. So the tax cost of the repatriation would be very low, and almost all of this money would be earmarked for dividends. The same can be applied to Google (some $86.3 billion) or Netflix ($68.8 billion). It doesn’t seem as if these companies are going to earmark this massive amount of capital for share buybacks because…their shares are already too expensive.