The question is whether that dominance will continue and if the same companies remain the leaders. It is an interesting question. The number of publicly traded companies continues to decline, as shown in the following chart from Apollo.was once a publicly traded company before Elon Musk acquired it and took it private. Unsurprisingly, with fewer publicly traded companies, there are fewer opportunities as market capital increases.
Over the next decade, companies like Microsoft, Apple, and Alphabet will face the challenge of growing revenues fast enough to keep earnings growth rates elevated. Given that Nvidia is a relatively young company in a fast-growing industry, it has been able to increase revenues sharply to support higher valuation multiples.
However, the larger a company becomes, the more difficult it becomes to achieve a high growth rate. For example, a firm with a 1% market share might quickly achieve 2%. As investors buy shares of a passive ETF, the ETF must purchase the shares of all the underlying companies. Given the massive inflows into ETFs over the last year and subsequent inflows into the top 10 stocks, the mirage of market stability is not surprising.
Whatever the reason, the eventual reversal of buyback programs could severely limit the current leader’s market dominance. As investors, it is vital to understand the dynamics of each market cycle and invest accordingly. However, those buying stocks today at some of the most extreme valuations we have seen over the last century and expecting those shares to dominate over the next decade could be disappointed.