The Nifty Fifty Have a Message for the Tech Obsessed
Last week’s purge in technology stocks show it’s time for a history lesson.
The pandemic has been good to certain stocks.
Photographer: Timothy A. Clary/AFP via Getty Images
Even with its biggest weekly setback since the early days of the Covid-19 pandemic in March, a small group of technology-related stocks remain well up for the year, as evidenced by the 70% gain in the NYSE FANG+ Index. This select group of 10 companies consists of such household names as Facebook Inc., Amazon.com Inc., Netflix Inc. and the parent of Google (hence “FANG”). The broader market isn’t doing as well, with the S&P 500 Index up only around 1% for the year and the New York Stock Exchange Composite Index down some 11%.
Sure, there are plenty of reasons for the explosion in these stocks. The companies are forecast to have huge earnings in future years, which when discounted back to the present at today’s low interest rates results in large numbers that many believe justify the lofty stock prices. The risk-free 10-year Treasury note yields about 0.85%, and with that as the discounting rate, $1 in earnings 10 years out is worth 92 cents today, almost 50% more than the 61 cents if that discounting rate were 5%. The same concept is imbedded in substituting earnings yields, which is the inverse of sky-high price-to-earnings ratios. For the S&P 500 Index as a whole, the 3.8 earnings yield looks much cheaper in relation to Treasury security yields rates than its 26 P/E ratio.