Top Stocks’ Troubled Tenure: Why Big Companies Struggle to Last
Investors often ponder which companies will dominate the stock market a decade from now – the “Magnificent Seven” of 2033, so to speak. While predicting future market leaders is a challenge, there’s a historical trend suggesting that today’s “Magnificent Seven” companies – Microsoft, Apple, Amazon.com, Nvidia, Alphabet, Meta Platforms, and Tesla – may not maintain their positions in the long run.
When Giants Fall: The Long-Term Outlook for Market Leaders
Research conducted by the investment firm Research Affiliates, under the leadership of Robert Arnott, examined the performance of the 10 largest-cap companies at the beginning of each decade since 1980. The findings revealed that, on average, eight of these top 10 companies were no longer on the list by the decade’s end. Furthermore, their 10-year performance consistently lagged behind that of the overall U.S. market.
Tesla and Nvidia are almost a certainty. That these stocks / market caps will be MUCH lower in 2033 than today. They won’t be in the top 10. The valuation today makes it likely. $AMZN still won’t earn money in 2033 and valuation is a problem.
Investor’s Dilemma: Will Today’s Titans Remain Tomorrow’s Leaders?
Why do the largest-cap companies tend to lose their dominant status? Several factors contribute to this phenomenon:
- Overvaluation: It’s highly likely that the largest-cap stocks are, on average, overvalued. Their prominence is often driven by investor sentiment and enthusiasm. Overvaluation is more common among favored stocks than those out of favor.
- Competition: As observed in a 2012 study titled “The Winners Curse,” companies that are at the top often face intense competition, scrutiny, and challenges from governments, customers, and rivals. In a world where underdogs are cheered for, few outside the organization root for continued dominance.
- Law of Diminishing Returns: Many of the largest companies are expected to maintain impossibly rapid growth rates, even though they are already substantial. Achieving such growth becomes increasingly difficult as a company’s size expands. Moreover, it’s mathematically improbable for all of them to grow at that pace without surpassing the entire economy.
In summary, while the Magnificent Seven stocks may exhibit strong performance in the short term, their long-term prospects appear mediocre at best. Robert Arnott aptly noted, “Whoever coined the expression ‘Magnificent Seven’ for these companies presumably didn’t see the movie, where four of the seven are dead by the end of the film
