The S&P 500 index has risen from 2,182 a year ago to its current level of 2,579 – a gain of 18% in 12 months. The surge in share prices has been led by technology stocks. Jim Cramer, an American television personality who hosts CNBC’s Mad Money show, coined the acronym “FAANG” to represent the leading companies in the tech sector.
The five FAANG stocks – Facebook, Apple, Amazon, Netflix, and Alphabet, which is Google’s parent – have all delivered high returns to investors in the past year. What is the reason for the skyrocketing valuations that the market has given these stocks?
While rising revenues and profits and a rapidly growing customer base have contributed to the increase in share prices, many investors believe that the best is yet to come. That is how they justify a price-earnings (P/E) ratio of 285 for Amazon and 195 for Netflix. The P/E ratio of the S&P 500 index is only 24.4 – and many analysts believe that at this level, the market is overvalued and is due for a correction or even a crash.
But the FAANG story remains largely intact. If you had bought one of the FAANG stocks exactly a year ago, you would have made a return of between 34% and 68%.