In recent years, a handful of "super-large-cap stocks" have become the mainstay of the market's rise.The question is, can these mega-cap stocks continue to do so? This issue is critical because these mega-cap stocks have significantly affected the overall performance of the U.S. stock market.

Concentration of fundsOn the one hand, the charts provided by Apollo already show that the number of listed companies continues to decline.

Number of listed companies in the United States

There are many reasons behind the decline, including mergers and acquisitions, bankruptcies, leveraged buyouts and private equity operations. For example, Twitter (now known as X) was a public company before Elon Musk took it private. As the number of listed companies decreases, although there is more money in the market, the opportunities decrease.This phenomenon is particularly evident for large institutions that need to deploy large amounts of capital in a short period of time. Today, nearly 40% of companies in the Russell 2000 index are currently losing money, further limiting funding options.Investors must consider whether Microsoft (MSFT), Apple (AAPL), Google (GOOG) and Amazon (AMZN) can maintain their leadership positions over the next decade. Just as AT&T (T.US) and General Motors (GM.US) were Wall Street darlings of yesteryear, today's technology stocks may become relics of the past.

Profitability growthWhen a company's profits show growth, investors are willing to invest more funds.However, the situation in 2023 is that all earnings growth will come from the top seven "mega-cap" stocks in the index. Excluding these seven stocks, the S&P 500 would actually face negative earnings growth.This scenario is likely to lead to weaker market performance. It’s worth noting that while analysts are optimistic that earnings growth for 493 stocks other than these seven companies will accelerate by the end of 2024, those expectations may ultimately be dashed given the slowing trend in economic data.

Earnings growth of the seven largest U.S. stocks

Over the next decade, companies such as Microsoft, Apple and Google parent Alphabet will face the challenge of maintaining rapid revenue growth to maintain high earnings growth rates. As an emerging company in a fast-growing industry, Nvidia is able to significantly increase revenue, supporting its higher valuation multiple. However, due to the law of large numbers, Apple, as a mature company, cannot achieve such rapid revenue growth.

"Trees don't grow to the sky." In the investment world, this sentence is a warning of the risks faced by high-growth but gradually mature companies. In some cases, companies are overvalued based on unrealistic expectations that they can maintain the same high growth rates even as they expand.

For example, if a company's current annual revenue is $10 billion and its growth rate is 200%, it can achieve tens of billions in revenue within a few years at this growth rate.However, the larger a company becomes, the more difficult it becomes to maintain high growth rates. For example, a company with a 1% market share can easily double its share to 2%. But when a company's market share reaches 80%, if it wants to double its sales, it needs to open up new markets or enter areas where it does not yet have an advantage. In addition, as a company expands in size, efficiency and innovation typically decrease, which is a manifestation of the diseconomies of scale.Because of this, many of the stocks with the highest market capitalization weights today may no longer be regulars on the list ten years from now. Just as AT&T has become a relic of the "new technology" of the past, perhaps Apple will suffer a similar fate in a few years when smartphones are no longer a necessity.

The impact of passive investingOver the past two decades, the rise of passive investing has brought interesting changes to financial markets. The top ten "mega-cap" stocks in the S&P 500 account for more than one-third of the index.In other words, a 1% increase in the top ten stocks is equivalent to the same increase in the remaining 90% of stocks. When an investor purchases shares of a passive ETF, the ETF must purchase all shares of its underlying company. Given the massive inflows into ETFs over the past year, especially into these top 10 stocks, it's no surprise that the market seems stable.

Market capitalization weight of the top ten stocks

Needless to say, this forced infusion of money into the largest stocks by market capitalization makes market performance appear stronger than it actually is. This is why the cap-weighted index of the S&P 500 (RSP) has outperformed the equal-weighted index in recent years.However, investors often overlook the other side of this double-edged sword. Take Tesla (TSLA.US) as an example. Let’s assume Tesla’s weight in the S&P 500 was 5% before Nvidia (NVDA.US) entered the top ten. As Nvidia's stock price rose rapidly, its market capitalization increased, while Tesla's stock price fell, causing its weighting in the index to decrease. Therefore, all index-tracking funds, passive fund managers, investment organizers, etc., have to increase their holdings in Nvidia while reducing their holdings in Tesla.

NVIDIA vs Tesla Market Cap

Whatever new generation of companies wins Wall Street's favor in the future, the current leaders will likely fall out of the top 10 as "passive" flows require selling today's leaders in order to buy more of tomorrow's stars. Under this mechanism, the adjustment of market weights will be a continuous process, reflecting the profound impact of passive investment on market dynamics.

Impact of share buybacksCorporate share buybacks, expected to approach $1 trillion and exceed that figure by 2024, could put pressure on the positions of existing market leaders. This is because large companies with strong cash resources to execute huge buyback programs, such as Apple, Microsoft, Google parent Alphabet and Nvidia, dominate the buyback market. Take Apple as an example. One of its companies will account for more than 10% of the total repurchases in 2024.Mega-cap companies can maintain market dominance as long as they continue to be the largest buyers of their own stocks.However, the current pace of buybacks will eventually come to an end, for reasons that may include:●Changes in tax laws● Prohibition on stock buybacks (prohibited in the past due to market manipulation)●Profitability reversal makes repurchase difficult●Economic recession or credit event forces companies to take a defensive stance (e.g., 2000, 2008, 2022)

Whatever the reason, a reversal of the buyback program could seriously weaken the market power of existing bellwether stocks.

The current dominance of "mega-cap stocks" is expected. As mentioned earlier, these companies are the source of most of the S&P 500's earnings growth and revenue, and are also the main buyers of their own stocks. They have been right at the heart of every technological revolution over the past decade, including the current wave of artificial intelligence.However, given the rapidly changing nature of technology and the economy, it is foreseeable that the leading companies of the past decade may not continue to lead the next decade. It is crucial for investors to understand the inherent laws of each market cycle and make investment decisions accordingly. However, investors who bought stocks at extreme valuations over the past century with the expectation that they would remain dominant over the next decade may be taking a hit.Although a variety of factors support the current long-term bull market, historical experience shows that blind investment often leads to unsatisfactory results.