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Goldman tells its richest clients why 'FANG' stocks aren't really driving the rally

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The role of the “FAANG” and “FAAMG” stocks have played in the rally is much more muted that investors might think, according to Goldman Sachs.

“In addition to the misconception that this rally has been driven by easy money, irrational exuberance or the impact of Trump administration politics, we believe that there is a significant misconception about the role of FAANGs in boosting returns,” Goldman’s Sharmin Mossavar-Rahmani and Brett Nelson wrote in their 2018 annual outlook that’s sent to the firm’s multimillioniare clients.

Goldman noted that many have suggested that the FAANGs account for a vast portion of stock returns.

“The facts suggest otherwise,” Goldman wrote.

In 2017, the S&P 500 returned 21.8%, while the FAANGs (Facebook (FB), Amazon (AMZN) Apple (AAPL), Netflix (NFLX), and Google (GOOGL)) returned 46.5% and the FAAMGs (Facebook, Amazon, Apple, Microsoft (MSFT), and Google) returned 45%. The entire information technology sector returned 38.8% in 2017.

“If we take out each of these groups with their respective market shares of 10.8%, 13.4% and 23.8%, and reassign those weights back into the rest of the S&P 500, the returns for the S&P 500 decline to 19.4% without the FAANGs, 18.9% without the FAAMGs, and 17.4% without the entire information technology sector,” Goldman wrote. “By any measure, such returns are extremely strong. To put these numbers in context, the bull market between 2002 and 2007 provided an annualized return of 17.1%.”

To look at it another way, since Facebook went public in 2012, the S&P 500 (^GSPC) produced an annualized return of 15.5%. Taking out the FAANGs, it produced an annualized return of 14.7% in that time and 14.5% without the FAAMGs.

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