The recent stock market surge has drawn comparisons to the Tech Bubble of the late 1990s. However, a stronger resemblance can be drawn to the Nifty Fifty fad of the late 1960s and early 1970s. This article explores the parallels between the current market leaders, particularly the FANMAG stocks (Facebook, Apple, Netflix, Microsoft, Amazon, and Google), and the Nifty Fifty, examining their characteristics, valuations, and potential risks.
The Nifty Fifty were a group of approximately 50 large-cap companies considered blue-chip investments during the late 1960s and early 1970s. These companies boasted strong earnings growth and profitability, leading investors to believe they were “one-decision stocks”—buy and hold forever. However, their high valuations eventually led to disappointing returns starting in 1973.
The chart above illustrates the performance of the Nifty Fifty, Tech Bubble stocks (proxied by the NASDAQ 100), and FANMAG stocks relative to the S&P 500 over a 10-year period. While the future performance of FANMAG remains uncertain, the historical trajectory of the Nifty Fifty offers a cautionary tale.
The Nifty Fifty comprised well-known companies like IBM, Kodak, and General Electric. While initially successful, their high valuations ultimately led to underperformance. By the end of 1972, the average price-to-earnings (P/E) ratio for the Nifty Fifty was around 43, more than double the S&P 500’s P/E ratio of 18.
The Nifty Fifty experienced exceptional growth leading up to 1972, with average annual earnings growth exceeding 22%. However, this rapid growth proved unsustainable. The 1973-1975 recession triggered a bear market, and the Nifty Fifty suffered significant losses, underperforming the broader market.
Similarly, the FANMAG stocks have demonstrated impressive earnings growth and profitability in recent years. Their average annual earnings growth for the five years ending in 2020 was almost 60%, significantly outpacing the S&P 500. However, like the Nifty Fifty, FANMAG stocks carry high valuations. Their average P/E ratio at the end of 2020 was over 48.
The high valuations of FANMAG stocks raise concerns about their future performance. Continued exceptional growth is required to justify these prices, and several factors, such as competition, antitrust regulations, and the inherent challenges of maintaining growth as companies mature, could hinder their progress. History suggests that stocks with the highest growth expectations often underperform in the long run. While FANMAG are undeniably successful companies, their high valuations warrant caution. Investors should consider diversification and explore other market segments, such as smaller and value stocks, to mitigate potential risks.
