The FAAMG stock complex [Facebook, Apple, Amazon, Microsoft and Google] has been one of the best investments of the past five years amid the incredible advances in technology that have powered massive bottom line gains for the biggest of the biggest in tech.
But the heady quarterly earnings gains for the likes of Facebook, Apple, Amazon, Microsoft and Google that investors have come to know and love may be at risk of a sharp cool-down if the Biden administration's various tax hikes kicks in next year, Goldman Sachs chief U.S. equity strategist David Kostin warns.
"If the Biden corporate tax plan were fully enacted, FAAMG 2022 estimated earnings would decrease by roughly 9% relative to consensus expectations," Kostin says. By comparison, the S&P 500's earnings would be reduced by 8% under the new corporate tax rate.
Kostin says FAAMG stocks are also vulnerable to any increase in the capital gains tax.
"If the capital gains tax rate becomes set to rise in 2022, investors subject to the higher rate may choose to realize some of their substantial capital gains in 2021 at the lower current tax rate. The FAAMG stocks have appreciated by $5 trillion during the last 5 years, accounting for 29% of the S&P 500 market cap increase during that time," Kostin explains.
Adds Kostin, "The proposed tax reform plans by President Biden would raise both corporate and capital gains tax rates and represent possible sources of risk for the FAAMG stocks."
Suffice it to say, FAAMG lovers appear ill-prepared for changing bottom line dynamics under the new administration.
Goldman's research finds that FAAMG stocks trade at a forward price-to-earnings (P/E) multiple of 29 times, compared to 21 times for the remaining 495 stocks in the S&P 500. This 34% premium for the five largest stocks ranks in the 76th percentile going back to 1980.
These five stocks alone account for a whopping 21% of the S&P 500's index capitalization. That's not only significantly more than the long-term average of 14%, but also the 18% found at the peak of the tech bubble in 2000.