Investors in popular FAANG stocks have enjoyed a great run over the last year (especially the past month) as a combination of super low interest rates from the Federal Reserve and high growth from the individual tech companies has made an easy bull case.
But with the Fed on the cusp of beginning a tapering of its pandemic-era bond buying program — which could push up rates from the rock bottom that risk-taking traders have loved —the FAANG trade could be nearing a pullback.
"I think the tapering is one [part] of the equation that I think should ultimately hurt the valuations of those high multiple stocks if the back end [of the rate curve] starts to move with the tapering announcement officially," said Morgan Stanley chief investment officer and chief U.S. equity strategist Mike Wilson on Yahoo Finance Live.
The closely followed strategist says FAANG [Facebook, Apple, Amazon, Netflix and Google] stocks and other high growth names could also be hurt as more people return to offices.
"The other risk that people don't talk about much for those stocks is that these are some of the prime beneficiaries of the work from home phenomenon. I think people are being complacent around the payback for demand for secular growers. It doesn't change the secular growth story, but they are cyclical to some degree and there could be payback in the earnings estimates. I think that's the bigger risk than it is say valuation or rates," Wilson explains.
To be sure, the FAANG stocks have enjoyed an impressive run so any pullback would likely come as a surprise to hardcore fans of the group.
For instance, Netflix shares are near a record high after a one-month 17% surge on optimism around its upcoming content slate. Over the past year, the stock has logged a respectable 21% gain.
Apple is up about 4% inside of a month, pushing its one-year gain to about 32% as excitement on the next iPhone builds. Facebook is up roughly 40% in one-year, or 5% in the past month alone with its financials continuing to be strong during the pandemic. Google has surged 85% in the last year, or 4% in a month as the company's profit outlook has improved.
The lone laggard has been Amazon, which is only up 7% in one year's time amid a tempering in online shopping after a big 2020.
"What's most interesting is the continuation of the digital transformation, and investors really realizing that when we see these tech stocks they seem to be a little bit resilient to a lot of the other pressures that are put on other sectors," said Plexo Capital founding managing partner Lo Toney on Yahoo Finance Live of the move higher in FAANG stocks.
But that resiliency may soon be tested.