The US market has led the global economy over the past decade, but valuations have dropped substantially this year as high inflation and tougher monetary policies have battered the earning potential of many businesses.
The S&P 500 index surged 97.4 percentage points ahead of the MSCI World index over the past 10 years but has dropped 7.7% since the start of 2022 as markets tumbled.
So far this year, the US market has fallen 2.4 percentage points behind the UK’s FTSE All Share index, putting on course to fail to beat the domestic market for the first time since 2017.
Mega-cap companies such as Meta, Amazon, Apple, Netflix and Alphabet (which make up the FAANGs) had a dominant presence in global markets for much of the past decade, but their share prices have dropped now that investors have turned their attention to cheaper options.
Share price of the FAANGs since the start of the year
Source: Google Finance
Their share prices became extremely high as investors flooded to grab a slice of their booming profits, so their negative performance this year is an unusual sight. However, the chance to buy one of the US’s highly sought large-cap companies at a discounted price may present an appealing opportunity to some.
Below, Trustnet has found the top 10 S&P 500 stocks that declined the most in share price since the start of the year.
Source: AJ Bell
Streaming service, Netflix, had the biggest drawdown in the index, dropping 70.4% at the time the data was collected. Despite its cheap price, Felix Wintle, manager of the VT Tyndall North American fund, said he would not go near the stock.
Some stocks in the index may have been dragged down along with its peers despite having strong business models, but Felix stated that Netflix’s problems are “existential”.
The major barrier facing the company is its declining subscriber growth, which it is hugely reliant on.
In the first quarter, the number of new paying users was down by 200,000 and could well fall further as the cost-of-living crisis forces consumers to cut spending on non-essential services.
“The fact that subs have peaked and are now decelerating is a major problem, as much of the value of the franchise is linked to subscriber growth,” he said.
Netflix’s revenues are growing, with the company recording a 9.8% increase in the first quarter, but this is less than half of the 24.2% growth during the same period last year.
Likewise, the streaming service is under pressure to increase the amount it is spending on new content to retain existing subscribers, according to Wintle.
In a recent letter to shareholders, Netflix announced its intentions to clamp down on the 100m households that are avoiding subscription fees by sharing memberships.
Mark Crouch, analyst at eToro, said: “It has been fairly relaxed about that until now but is testing out ways to extract more cash out of them.
“That may well boost revenue in the short term, but to expand its reach to people who do not interact regularly with Netflix will require the streaming firm to keep producing the goods when it comes to content”
Alternatively, it may introduce an advert-based model to bolster revenues, but it is “too little too late,” according to Wintle.
Andy Merricks, fund manager at 8AM Global, also said that Netflix is the stock he would be least likely to invest in.
He agreed that the service would be one of the first cut-backs customers make as they tackle higher inflation, which would cut off a major source of the company’s revenue.
“I see Netflix and Meta as a bit of a fad – they’re very dependent upon outside influences. I don’t think they’re in as much control as something like Paypal,” Merricks added.
Unlike Netflix, he said that Paypal is a part of digital infrastructure and not a luxury service so customers would be less likely to stop using it.
Merricks said: “It's more embedded into the consumers’ behaviour and I can't see that slowing down. It may slow down if there's a recession but not as much as it will for something like Netflix.”
The company was down 62.1% since the start of the year, with free cash flows falling 32% in the first quarter. Net revenues were up 8%, but the service is not being used as often as it was in the e-commerce boom of lockdown
Of the other S&P 500 stocks that dropped the most this year, Wintle said that he would consider buying Align Technology now that it has fallen 63.2%.
The business had a range of products used in orthodontics, and its invisible braces called Invisalign are uniquely different to other alternatives in the market, he said. Although its share price has been anchored down, the underlining business has strong pricing power with this product.
Wintle added: “We view the global market for Invisalign to be vastly under penetrated and with the stock trading at near trough multiples, we think it is an exciting prospect for the longer term.”
Earning per share (EPS) are expected to grow 23% in 2023, which may help to recover the share price.
While it may be tempting to buy these stocks whilst they are cheaper than their historical average, Russ Mould, investment director at AJ Bell, warned investors not to “try and catch falling knives”.
High inflation and sharp interest rate rakes have dragged valuations down across the board, and these drawdowns are unlikely to even out until the Federal Reserve (Fed) eases its hawkish stance on monetary policy, he said.
He advised investors to keep a close eye on declining stocks but wait until the next bull market before striking.
As it stands, Mould expects the Fed to begin cutting rates in early 2023, so there is some time left before the market begins its recovery.