OPINION: Apple, Amazon and Alphabet will not dominate the stock market in a decade’s time. That's because stocks that top market-cap rankings usually underperform on average over the next decade.
It’s impossible to know which stocks will dominate the stock market in a decade’s time, but we can fairly confidently say which companies will not be on that list: stocks that currently top today’s market-cap ranking — namely Apple AAPL, +2.80%, Microsoft MSFT, +2.83%, Amazon.com AMZN, -1.12%, Alphabet GOOG, +0.38% and Meta Platforms FB, -0.02%.
Arnott found that the 1980s were not unique. He reached a similar result for the top stocks of the 1990s, 2000s, and 2010s. On average, a stock on any of these lists underperformed the market over the subsequent decade. In addition, there was between a 70% and 80% chance that any given stock would not be on the comparable list one decade hence.
Valuing a cap-weighted market Arnott believes there are even better ways of weighting stocks in an index beyond equal weighting. His firm maintains a number of so-called fundamental indices that base a stock’s weight on fundamental characteristics such as sales, cash flow, dividends and book equity value.
Consider the S&P 500 currently, in which just six stocks — Apple, Microsoft, Alphabet, Amazon, Tesla TSLA, +1.32% and Meta Platforms — account for 26% of the index’s total market cap. Imagine a situation in which those six are overvalued while the other 494 stocks, on balance, are more fairly valued. In that case, the valuation ratios for the S&P 500 as a whole could paint a skewed picture.
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