Historically, on average, the very largest firms are underperformers.
Fairly obviously, firms which are currently very overvalued are likely to be over-represented in that group of largest market cap stocks.
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This probably needs more studies. I think the Internet business differs from traditional business in important aspects:
larger economic scale (not as much capital required), less structural bureaucracy and faster reaction to market.
Internet companies are interesting economically, to be sure.
But beware the dangers of edging too far towards the narrative of “it’s different this time”.
Just because they’re big and profitable and have done well lately doesn’t mean they can’t be overvalued some of the time.
And in any case, I’m stating a generality over time, not something one can assume to be correct about specific stocks in a specific year.
An equally weighted portfolio of the 5 largest market-cap firms underperformed the S&P 500 by 3.79%/year in the 39 years to 2017, and remarkably consistently.
And of course there was such a thing as big successful tech firms during much of this stretch.
Since then, a little over 5 years, the top 5 have beat the S&P by 13.13%/year.
Is that because the world is different this time, or just the luck of the draw of the intersection of “big” and “strong stock performance”.
Is it different this time, or just one of those semi-rare stretches that the biggest happen do to well?
If I were picking an index fund to ride for the next 25 years, it wouldn’t be cap weighted.
For multiple reasons, but long run underperformance is a biggie.
If something just out of the top few gets overvalued, it will get up into the top few ranked by size.
That’s why it happens. And it certainly does happen–there are lots of papers on it.
Jim