FANG stocks have lost their characteristic mojo, but investors are sticking with them

FAANG stocks displayed at the Nasdaq.

Adam Jeffery | CNBC

The mega-cap tech stocks that have led much of the record-long bull run have started to lose steam, but investors are still giving them the benefit of the doubt.

The so-called FANG block of tech giants — Facebook, Amazon, Netflix and Google's parent Alphabet — are still mostly in the red for the trailing 12 months despite their strong year-to-date comeback. Amazon's single-digit gains in the past 12 months can also be compromised if the e-commerce giant disappoints when reporting earnings next week.

It has become apparent that the backdrop for Big Tech is turning unfavorable from the government crackdown to the U.S.-China trade war to a global economic slowdown. Adding to the list of worries is their earnings trend — Netflix tanked more than 10% on Thursday on a surprising drop in the subscriptions number. But so far, many investors believe these are just "hiccups" on their mega upward trend.

"It's undeniable they've had a very robust run," said Mike Loewengart, chief investment officer at E-Trade Capital. "With the ones that have elevated evaluations where there are a lot of expectations going into their near-term results, when there are hiccups along the way, it's not unreasonable to see them fall in response to that."

Regulatory overhang

Perhaps the biggest backlash brewing against those tech superstars is the government's antitrust investigations. The Federal Trade Commission and Department of Justice have launched a probe into FANG's privacy practices and monopoly claims. Meanwhile, a potential breakup of Big Tech has turned into a campaign issue in the 2020 presidential election.

"The question is how much we are transitioning from a Wild West environment for Big Tech to something that's more regulated and governed," said Jeff DeGraaf, founder and chairman of Renaissance Macro Research. "They are leaning bullish but there's some evidence that they are under distribution and the question is whether the bulls can come back and support them."

Some investors see similarities to the overhang on Microsoft in the 1990s. Back then the federal government charged Microsoft with acting as a monopoly and limiting competition on PCs.The company was not forced to split up in the end, but the settlement diminished its web browser dominance.

Microsoft's stock went through "a huge consolidation from 2002 and finally broke out in 2013. That thing was dead money for a decade. That's the risk of a regulatory overhang," DeGraaf said.

Some believe the crackdown won't get worse until at least 2020.

"I think that some of the regulatory risk is getting better from a practical standpoint," said Jason Helfstein, Oppenheimer's head of internet equity research. "Republicans and Democrats don't seem to want to produce legislation together about privacy or data laws ahead of elections."

Toppy?

Concerns are also growing that if those expensive FANG names have reached their peaks, then maybe the overall market has as well.

The big technical signal to watch is if they breach below their lows during the correction in late May amid heightened trade tensions, according to DeGraff.

"Then it starts to look more distributive and more toppy and that's more of a concern," he said.

Alphabet and Amazon are set to release their second-quarter result on Thursday. Investor sentiment seems to remain guarded about those two names.

"Generally cautious among investors that revenue could go down," Helfstein said of Alphabet. He's also conservative with Amazon, saying the main thing to look at is what one-day shipping does for margins.

— CNBC's Maggie Fitzgerald contributed reporting.

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