On May 9th, Michael Michael Wilson, chief equity strategist at Morgan Stanley, said that the shares of the five technology giants FAAMG had outstanding returns in the first quarter, and pointed out:

After impressive first-quarter results, the much-vaunted FAAMG stock was sold off. This reminds us that the stock market tends to peak on good news. "

The yield on FAAMG shares soared to 56% in 2020, accounting for 7% of last year's 18% return on the s & p 500, and in recent months there have been fears that FAAMG shares have begun to decline.

David Kostin, Goldman Sachs Group's chief equity strategist, gives the latest weekly report on FAAMG stocks. 'faced with the prospect of a slowdown in US economic activity, Goldman Sachs Group's customers suddenly panicked at the collapse of FAAMG, 'Mr. Kirstin wrote. While many investors say the economic slowdown should support the performance of the largest technology stocks on the market, they are also asking about the possibility of changing FAAMG's market leadership.

Kirstin acknowledges that market concentration is at an all-time high: the top five stocks in the s & p 500 account for 21 per cent of market capitalisation, well above the long-term average of 14 per cent and up from 18 per cent at the peak of the tech bubble in 2000. only lagging behind 25% reached in mid-2020.

Given the restrictions imposed by the Securities and Exchange Commission (SEC) on portfolio concentration, tech giant stocks have a considerable weight in the index, which limits the number of stocks that mutual funds can continue to buy, thus adversely affecting sustained appreciation in practice.

Of course, there is a reason why investors are pouring into FAAMG. First of all,The revenue flow resilience of these companies in 2020 contrasts sharply with the extreme decline in revenue streams of many other companies.Last year, the median revenue growth of S & P 500 companies fell to the lowest point of 7% before partially rebounding, with full-year growth flat.

By contrast, the total revenue of FAAMG's five stocks rose 18% in the second quarter of last year, when the economy contracted the most.FAAMG's annual revenue in 2020 was 21% higher than in 2019.

The results of the first quarter of this year show that FAAMG growth continues. Total sales in the first quarter of 2021 were $321 billion, 8 per cent higher than market expectations and 41 per cent higher than a year earlier. Revenue and earnings per share for the five stocks are widely expected to grow by 14 per cent and 10 per cent respectively in 2022, compared with a median of 6 per cent and 10 per cent for the S & P 500.

But Goldman Sachs Group said that the most prominent aspect of FAAMG's business model is not revenue growth.It is the amount and proportion of operating cash flow used to drive growth.

In 2020, FAAMG's five stocks spent $128 billion on research and development and $104 billion on capital expenditure, accounting for 22% of the S & P 500. In the past three years, the proportion of growth investment in FAAMG was 64%, while the proportion of growth investment in general stocks was 11%. As Goldman Sachs Group said, "they are investing in their own way to achieve higher growth." "

Risks faced by FAAMG

At the same time, Goldman Sachs Group mentioned a series of large and increasing risks facing FAAMG, starting with Biden's proposed tax reform that would raise corporate income tax and capital gains tax rates.Given that about 55 per cent of FAAMG's revenue comes from overseas, if Mr Biden's corporate tax plan is fully implemented, FAAMG's earnings in 2022 will be about 9 per cent lower than market expectations.If US statutory tax rates of 28 per cent and 21 per cent were applied to every part of FAAMG income, the collective effective tax rate of FAAMG would rise from 7 per cent to 24 per cent. FAAMG's revenue in 2022 would fall by 9 per cent (the S & P 500 is down 8 per cent).

In addition, FAAMG shares are also vulnerable to rising capital gains. If the capital gains tax is to be raised in 2022, investors affected by the higher tax rate may choose to take it in advance at the lower current tax rate in 2021.

FAAMG shares have risen by $5 trillion over the past five years, accounting for 29% of the market capitalization of the S & P 500 over the same period. In the event of a profit-making sell-off, FAAMG's shares could be hit hard.

Valuations also pose risks for FAAMG.FAAMG trades at 29 times forward earnings, while the remaining 495 stocks in the S & P 500 trade at 21 times forward earnings. Since 1980, the price-to-earnings ratio of the top five stocks has been at a premium of 34%, the 76th percentile. If the price-to-earnings ratio falls, everything will collapse. Kirstin wrote:

"current low interest rates and expected rapid growth support the high price-to-earnings ratio of FAAMG shares. "

Although nominal yields on 10-year Treasuries have risen this year, they are still extremely low by historical levels. As a result, low interest rates support valuations of high-growth, long-term stocks. The difference between FAAMG's current price yield (Eamp P) and the 10-year Treasury yield is 191bp, higher than the previous 40-year average of 144bp, suggesting that the value of these stocks remains attractive after adjusting for low interest rates.

The adjusted valuation also looks more reasonable: FAAMG is actually trading at a 14% discount (1.7 times) to the median price of stocks in the S & P 500. The rise in interest rates on US Treasuries may adversely affect FAAMG's revenue in the coming months, Goldman Sachs Group interest rate strategist predictsThe yield on 10-year Treasuries will rise 34 basis points to 1.90 per cent by the end of 2021.

In addition, compared with the Russell 1000 index, all five stocks of FAAMG have higher-than-average durations.Which means they are particularly sensitive to fluctuations in long-term interest rates.

When u.s. bond yields rose sharply from November to march, FAAMG's gains were a full 7 percentage points lower than the s & p 500 (s & p 500 up 21% gamg up 14%). If there is a similar rise in Treasury yields in the second quarter of 2021, it could depress FAAMG's returns again.

Kirstin pointed out that the biggest fundamental risk to the continued market leadership of FAAMG's five technology giants "seems to be potential regulatory intervention". He added that the recent appointment of the Biden administration "hints at the risks of stricter regulation and stricter antitrust enforcement. "

In addition to Microsoft Corp, FAAMG's other four companies face a series of lawsuits and monopoly investigations, ranging from business lawsuits to antitrust lawsuits from the U.S. Department of Justice and the Federal Trade Commission to congressional investigations.

Finally, Kirstin concluded that his forecasts for the S & P 500 by the end of 2021 and the end of 2022 were 4300 and 4600, respectively. If the revenues and earnings of these companies are in line with market expectations, then their relative valuations remain stableThis implies that antitrust actions have no significant impact.In short, Goldman Sachs Group's customers can rest assured that they can continue to buy FAAMG shares.