Step Aside FAAMGs: Goldman Presents The "Future Five" Stocks That Will Define The Decade

By now it is common knowledge that never in the history of capital markets has so much value (and interest) been concentrated in just five tech stocks, the FAAMGs. According to Goldman, the five largest companies comprise 23% and a staggering 39% of the capitalization of the S&P500 and Russell 1000 Growth indices (with Apple recently surpassing the market cap of the entire Russell 2000), respectively... and for good reason based on their YTD performance: AAPL, MSFT, AMZN, GOOGL, and FB have returned 40% YTD compared with 5% for the S&P 500. Furthermore, the firms form the pinnacle of the red hot "growth" factor as they are forecast to grow sales at a 22% annualized pace from 2018 to 2022 (vs. 4% for the theS&P 500) and trade at 6x EV/sales (vs. 3x).

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That said, as Goldman's David Kostin writes in an overnight note, investors are increasingly searching for fast-growing firms beyond the "current five." The reasons range from skepticism about continued momentum and valuation concerns to the purely structural. As Kostin notes, many mutual fund managers face limits on the weight of any individual stock in their portfolio (usually around 5% to be classified as a "diversified fund"). With several stocks exceeding the 5% threshold in benchmark indices, potential solutions for fund managers that face these limits include either reclassifying as a“non-diversified” fund or using factor- or performance-based substitutes for the largest constituents.

So what options do investors who need to branch out beyond the "current five" have? The answer, in a moment, but first a look at how we got here.

As Kostin writes, "the paths to market leadership varied for the "current five." AAPL is currently the largest stock in the index, with a market cap of roughly $2 trillion. AAPL experienced extraordinary growth in the late 2000s, rising from the 93rd largest S&P 500 stock at the start of 2005 to 11th in 2008, following the introduction of the iPhone in 2007. The stock has maintained its dominance since 2010 by combining its hardware business with services. AMZN has followed a similar path, entering the index in 2005 ranked 137th, but capturing substantial market share in e-commerce — often at the expense of near-term profitability — and growing to its current position as the third-largest company. FB and GOOGL both grew in size as private companies, entering the index in the top 25, and maintaining their rapid sales growth. In contrast, MSFT is the second-largest stock in the index and has been one of the five largest stocks in at least one month of every year since 1995.

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Of course, maintaining market leadership can be a difficult task and this unprecedented concentration may well prove to be fleeing because as Goldman notes, "index leadership is difficult to maintain" adding that the list of companies comprising the top positions in indices is not immutable. For one, index membership fluidity stems from the survivorship bias inherent in their design. Underperforming firms decline in weight or maybe removed altogether and are replaced by newer, faster-growing constituents. Looking at the previous period of elevated market concentration, the Tech Bubble, saw the five largest stocks comprise 18% of the S&P 500 market cap in 2000. But five years later, those same stocks accounted for 12% of market cap, and just 8% of market cap twenty years later. In contrast, 20 years ago the current five market leaders represented just 3% of the S&P 500 vs. 23% today. Only one of the five largest stocks in 2000 remains on the current list (MSFT) while the fifth-largest stock today (FB) was not even a member of the index until eight years ago.

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Moon Kil Woong 3 days ago Contributor's comment

LOL good luck with the vaccine. It will need to be treated like the flu and more effort and expediency should be spent on quick approval and development of therapeutics. Big pharmas want a vaccine because they know they will get a lot of money and nothing may come of it for a year or longer (maybe never). As for the future FAANG stocks (don't include Microsoft please) they are not as broad or as encompassing in tech as the current ones. They should do well but are more prone to technology displacement. I own one or more of these but would not switch unless you wish to replace Facebook with another stock.

I agree medical technology will continue to advance and play a bigger role in the economy. However, it is unclear which will dominate besides maybe ISRG who is the current leader. Even here, there will probably be many different surgical robotics doing different surgeries in the future.

Dick Kaplan 3 days ago Member's comment

The CDC Chief today said that a vaccine won't be widely available till 2nd or 3rd quarter of 2021.