Over the previous years, a handful of stocks with mega-market capitalization have been the frontrunners in market returns.

However, the burning question remains – will these giants maintain their dominance or will new leaders emerge on the horizon? The dynamics at play are indeed fascinating. With the declining number of publicly traded companies, notable due to various reasons such as mergers, acquisitions, bankruptcies, and the rising influence of private equity, the landscape of opportunities is shifting at a rapid pace.

Take the case of Twitter, now known as X, once a publicly traded company until Elon Musk swooped in to take it private. This trend of companies going private is contributing to a scenario where market capital is increasingly concentrated among a select few.

Notably, with close to 40% of companies in the currently operating at a loss, the pool of viable investment options dwindles further.

This trend of market capital concentration is not unprecedented. In past decades, we’ve seen similar scenarios unfold – the ‘Nifty 50’ in the 1960s, the ‘Dot.com’ boom in the late 90s revolving around companies like Cisco Systems, and today’s buzz around anything linked to artificial intelligence.

History shows us that the torchbearers of one era seldom remain the torchbearers of the next. A case in point being Nvidia, set to break into the list of mega-cap companies for the first time in 2024.

Investors are now left to ponder whether stalwarts like Microsoft, Apple, Google, and Amazon will retain their supremacy in the coming decade, or will new disruptors emerge to claim the spotlight?

Just as AT&T and General Motors had their time in the sun on Wall Street only to fade into obscurity, today’s tech behemoths might also meet a similar fate.

Unraveling Earnings Growth

One critical piece in deciphering the future trajectory of these tech titans lies in their earnings growth. It’s a well-known fact that investors are willing to pay a premium for stocks with robust earnings growth.

However, the plot thickens when we realize that in 2023, all the earnings growth in the S&P 500 could be credited to the top seven mega-cap stocks. Subtract these seven, and the index would paint a less rosy picture of earnings growth.

While hopes are high that the earnings growth of the remaining 493 stocks will pick up in the latter half of 2024, the prevalent economic data suggests otherwise.

Companies like Microsoft, Apple, and Alphabet are now faced with the arduous task of accelerating revenue growth to sustain high earnings growth rates over the next decade.

Meanwhile, the youthful Nvidia, operating in a rapidly evolving industry, has managed to ramp up revenues significantly, supporting its lofty valuation multiples.

The tale shifts when we look at Apple, a seasoned player in the tech arena. Its growth potential is curtailed by the phenomenon known as the law of large numbers, as depicted in the 5-year annualized growth rate of revenues.

The adage “Trees don’t grow to the sky” strikes a chord here. It serves as a cautionary reminder of the pitfalls awaiting maturing companies sustaining high growth rates.

Impact of Passive Investing

Beyond earnings growth, the rise of passive investing in the financial realm over the last two decades has introduced a fascinating dimension to market dynamics. Today, the top 10 mega-cap stocks in the S&P 500 command over a third of the index’s weightage.

Essentially, a 1% movement in these top 10 stocks mirrors a 1% shift in the remaining 90%. This disproportionate influence stems from the structure of passive ETFs, necessitating the purchase of shares in all underlying companies as investors pour money into these funds.

Resultantly, the influx of capital into the heavyweight stocks creates an illusion of market stability. This influx also explains why the market-capitalization weighted S&P 500 index has outperformed its equal-weighted counterpart in recent years.

One should not overlook the ripple effects of this phenomenon. Consider the case of Tesla, a significant player in the S&P 500 index, whose weightage might have diminished as Nvidia surged into the top 10, triggering a reshuffling of weightings across the indices by passive fund managers and investors alike.