One shocking chart suggests mega-cap tech juggernauts are in for a rude awakening - and that sharp losses could be coming
- For years, the mega-cap tech cohort featuring Facebook, Apple, Amazon, Netflix, and Google have reigned supreme in the stock market.
- One market expert argues that their long-running streak of dominance is doomed to end someday, and provides a compelling chart to support that idea.
Tech stocks are frequently branded as the new torchbearers of the stock market. And based on their performance over the past decade, it's hard to argue with that classification.
But what if tech stocks are just locked in a temporary cycle of expansion - one that's doomed to give way to a hot new group at some point in the future?
That's an idea being bandied about by noted market bear John Hussman, the former economics professor and current president of the Hussman Investment Trust. He argued in a recent blog post that seemingly unassailable tech juggernauts like Facebook, Apple, Amazon, Netflix, and Google will one day be replaced as the illuminati of the stock market.
"While some analysts have argued that the current batch of glamour technology companies has boosted profit margins permanently, they seem wholly unware of the regularity with which this argument has been made across history," Hussman said.
He continued: "The argument is recurrently applied to a rotating group of companies that invariably become associated with the New Economy, as opposed to the defunct Old Economy upon which traditional valuation measures have been defined."
In support of his point Hussman uses the chart below, which shows the logistic growth curves for the aforementioned FAANG elite. The plot points show company revenue as a percentage of 2018 trailing-12-month annual sales, relative to annual revenue growth over the subsequent two-year period.
As you can see, the trend is firmly downward-sloping, suggesting the companies will start to lose their luster over time.
Perhaps the most notable finding on this chart relates to Apple, whose data is represented by pink triangles. Based on that, Apple appears to be the closest to seeing growth peak, which is a timely observation given the company's recent warning that sales will expand at a weaker pace than expected.
The big conclusion that Hussman hopes you draw from his chart is that, despite protestations to the contrary, is that the market's mega-cap tech leaders aren't as invincible as they seem. They may be paradigm-shifting businesses that have redefined commerce as we know it, but they can't rule forever.
"One of the hard lessons that investors will learn in the coming quarters is that technology stocks are actually cyclicals," Hussman said, reiterating an observation he made back in August 2000. "Modest changes in economic growth and overall corporate profitability have a highly leveraged impact on the revenue growth and profitability of technology companies."