Joe Biden's $1.9 trillion stimulus plan could wreck Wall Street's favorite money-making trade
President-elect Joe Biden’s extensive $1.9 trillion stimulus plan to combat the effects of the COVID-19 pandemic may supercharge economic growth, but also send Wall Street’s favorite five tech stocks known as FAANG into a short-term price slumber.
While naturally Biden’s fiscal relief won’t be causing quarterly earnings misses at Facebook, Apple, Amazon, Netflix or Google, his plan could dent market psychology on the stocks and in turn what multiple investors are willing to pay on each.
The line of thinking is rather straightforward to astute market watchers.
Biden’s stimulus package could send investors rushing into more cyclical stocks in the retail, energy and materials space in advance of strong lifts to the respective sector earnings growth rates. Those funds may come from cashing out of FAANG stocks, which gained an average 43% (versus a 27% rise in the Materials Select Sector SPDR Fund) over the past year fueled by views on the Street of Big Tech being economic safe havens.
Interestingly, this dynamic may already be playing out. Shares of the FAANG stocks are all slightly lower (Netflix the worst performer, is down 6.1%) year-to-date compared to the 1.1% gain for the S&P 500.
Supporting the possible rotation would be Wall Street analysts moving quickly to push up profit estimates on cyclical areas of the market. Looked at another way, investors would be positioning for faster earnings growth this year and next out of cyclicals relative to FAANG stocks because of the latest stimulus package.
“The spending comes at an interesting junction for analysts and investors as it will no doubt mean further EPS upgrades. It will also mean that many early cycle S&P 500 sectors will see faster earnings revisions than the popular FAANG+ and IT which dominated investor attention in 2020,” points out Jefferies strategist Sean Darby.
Not even 24-hours after Biden released his economic revival plan, Wall Street has already laid the groundwork for the unwind of the FAANG long trade.
Darby says his economic team at Jefferies lifted its 2021 U.S. GDP target to 6.4% from 5.25% after the release of Biden’s proposal. Jefferies analysts also raised their price targets and EPS estimates on their industrial coverage, Darby says.
The immediate tone is similar at Goldman Sachs.
“We do not expect all of the elements of the proposal to pass, but we are increasing our assumption of additional near-term fiscal measures from $750 billion (3.4% of GDP) to $1.1 trillion (5% of GDP),” Goldman’s Chief Economist Jan Hatzius wrote in a flash note to clients.
Not everyone on the Street is ready to toss in the towel on FAANG stocks, however.
Bulls argue that with the pandemic continuing to rage on and putting the economic recovery at risk no matter of a fresh stimulus injection, FAANG remains the best place to be. Companies such as Facebook, Apple, Amazon, Netflix and Google offer strong business models and growth prospects for the foreseeable future — and any dips in their stock prices should be bought, say the bulls.
“The FAANG names all have Josh Allen-like [Buffalo Bills quarterback] tailwinds, Biden is just evening the playing field for industrial, manufacturing, and small businesses on the other side of this dark chapter of growth,” Wedbush tech analyst Dan Ives says. “We view Biden plan as bullish for the market and our view is tech stocks still have another 25%+ upside for 2021.”
No doubt though the winds are starting to blow in the direction of the cyclical on the FAANG off-trade.
Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.
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