Adding to nervousness, FAANG stocks — Facebook FB, -0.29% , Amazon AMZN, +0.29% , Apple AAPL, +0.71% , Netflix NFLX, +1.03% and Google GOOGL, -0.29% (a.k.a. Alphabet) — face tough antitrust scrutiny, new challenges over user privacy and more competition. After leading the market for years, like Microsoft MSFT, -1.47% , Intel INTC, +1.45% and Cisco CSCO, -0.30% in the 1990s, they have somewhat receded into the pack.
Consumer spending and the broader service sectors are still growing and the FAANG’s challenges more likely herald opportunities for other leaders to come forward.
Disrupting the FAANGs
For example, Walmart WMT, +1.14% has fashioned a formidable web presence to rival Amazon in groceries and doesn’t suffer the same product quality problems in other areas. Netflix’s woes are driven by Disney DIS, -0.35% and others expanding in the video streaming space — likely expanding overall industry revenue and profits.
Microsoft has resurrected itself from a “legacy tech” to a leader in cloud services, and revolutions in artificial intelligence and robotics are driven by a host of smaller firms that are cutting waste out of the economy.
Searching for the brightest prospects requires information that ordinary investors cannot muster. They should stick to broad diversification — in particular, indexing — and ask how stock valuations stack up against history and prospects for continued growth.
The U.S. and global economies should continue to grow at about 2% and 3% in real terms and 4% to 6% nominally, respectively, with U.S. household income improving moderately. That should translate into gains in corporate sales and profits the first half of next year.
The American economy is adjusting to less emphasis on autos and residential construction—and temporarily Boeing BA, -0.85% — to greater reliance on digital technologies that are revolutionizing the services sector. For example, consumer accessible artificial intelligence through health apps and UberEats UBER, -0.05% and DoorDash.
Overall, profit growth may hit a nadir in the third quarter, possibly pushing stock prices to clutch down further, but that metric should accelerate to 8% or 9% by the first half of next year.
Stick with equities
Over the horizon, the stuff of strong gains beckons and is a good reason to stick with equities.
For ordinary investors, stocks, bonds and CDs are the only reasonable places for retirement money. IRS depreciation rules make investing in rental property difficult, and small investors can expect increasing competition from large firms — with significant backing from Wall Street — expanding into the businesses of flipping and renting homes.
Over the last 50 years, the S&P 500 has outperformed 10-year Treasuries TMUBMUSD10Y, +3.77% by more than 50%, and no compelling argument has been offered that the coming decades will be any different. With the Federal Reserve and other central banks in an interest-rate-cutting mode, stocks will continue to enjoy the edge over fixed-income assets—even with only moderate profit growth.
The world is awash with too much savings — businesses have more cash than new opportunities and international investors looking for safe havens for their wealth. A good chunk of that money will find its way into Treasuries — suppressing yields — and U.S. stocks — driving up P/E ratios.
Picking the next Apple or Amazon or timing when profits and stock prices will dip and then rise is a virtually impossible task — winning at that game has even eluded Warren Buffett over the last decade.
What to do
Small investors should invest for the long term by purchasing a broad-based index fund like the Vanguard, Fidelity or USAA S&P 500 portfolios. And perhaps an international index fund to smooth results — sometimes U.S. equities do better while other times foreign stocks lead.
Once within 10 years of retiring, gradually move about half of that money into fixed-income vehicles with maturities of less than five years. Avoid bond funds — it’s less risky to purchase fixed income through Treasury Direct or in CDs.
If you consistently add a reasonable amount to those investments throughout your working years, you should be in good shape to give your child a great wedding, pay tuition, and enjoy a secure retirement.