The "FAANG" stocks are a small group delivering stellar returns, but their ascent isn't the only reason the S&P 500 has risen to such a rich valuation, according to Rick Friedman and Anna Chetoukhina from GMO's Asset Allocation team.
Facebook, Apple, Amazon, Netflix and Alphabet (Google) — the so-called FAANG stocks — are up 36% on average year to date through September.
Friedman and Chetoukhina consider whether the sharp rise in the S&P 500's earnings multiple can be explained entirely by the changing sector composition of the index and its increasing tilt toward technology in their new Asset Allocation Insights piece — "FAANG SCHMAANG: Don't Blame the Over-valuation of the S&P solely on Information Technology."
"We know that the higher weight in the relatively expensive IT sector is driving some of the expensiveness of the S&P 500, but this does not fully explain the bulk of its high absolute and relative valuation level," the pair write.
