U.S. June market recap: a new tech bubble?; Amazon buys Whole Foods; and equity prices see record highs
10 July 2017
By Mike Coffey
Is there a new tech bubble out there?
A note from Goldman Sachs weighed on tech shares after the firm highlighted an increase in “mean reversion risk” for FAAMG stocks: Facebook, Amazon, Apple, Microsoft and Google (Alphabet), comparing the group to the 2000 tech bubble.
Clearly this has become a crowded trade as the FAAMG stocks have tacked on a total of $600 billion of market capitalization this year. According to Goldman this is the equivalent of the GDP of Hong Kong and South Africa combined. The group comprises about 13 percent of the S&P 500, but has accounted for almost 40 percent of its year-to-date performance.
While the FAAMG shares have had a hell of a run, valuations do not appear to be reaching the levels of the tech bubble of 2000 just yet. In 2000 the five largest tech companies were trading at almost 60 times two-year forward earnings, while the cheapest stock (Lucent) fetched a 36 times valuation. Today FAAMG trades at 23 times forward two-year earnings while only Amazon trades over 30 times.
Alexa: buy Whole Foods
Days after Whole Foods CEO John Mackey called activist hedge fund manager Jana Partners ‘greedy bastards’, the company agreed to be acquired by Amazon.com in a deal worth close to $14 billion. Ahead of the deal we noticed that traders were becoming very bearish of the food service distribution space.
Our sentiment indicator for Sysco and US Foods was the most bearish reading possible -50.
Our volatility expectations spiked. This was very interesting, as we are out of earnings season, yet the market was pricing in outsized volatility for the group. Sellers of the group performed well as the stocks moved sharply lower after the Amazon purchase of Whole Foods. JP Morgan analyst John Ivankoe stated “The risk has increased that AMZN becomes a disruptor to food service distribution models.” Some investors now worry that Amazon’s entry into the space will squeeze already tight profit margins.
Will the rally continue into the second half of the year?
The market has climbed a wall of worry in the first half, sending equity prices to record highs. As the world moves away from easy money policy, will the rally in equities continue?
We did see an uptick in volatility expectations at the end of June. The VIX index which tracks the volatility traders are pricing into the S&P 500 rose to 11.18. It is interesting to note that the VXN which is the CBOE Nasdaq Volatility Index surged to 17.61. Barron’s points out that the 6.4 point gap between the two indexes is more than four times the 10-year average of 1.5. The move indicates that investors are far more concerned about the Nasdaq than the S&P 500. So if the rally is to continue, traders may be looking for other sectors like financials to lead in the second half.
Mike Coffey is head of Business Development, Intelligence at Q4 and has over 20 years experience in the capital markets. Mike is a monthly contributor to Q4 blog.