The race to become the first $4 trillion company is captivating investors worldwide. While the spotlight shines on the current titans of industry – Microsoft, Apple, and Nvidia – the path to such a valuation is not as straightforward as it may seem.
The financial world is abuzz with projections of these tech behemoths reaching the $4 trillion mark within a few short years, fueled by their recent stellar performance. Yet, a seasoned market analyst cautions against linear extrapolation. Historical data reveals a counterintuitive trend: companies that ascend to the pinnacle of market capitalization often experience subsequent growth that falls below the broader market average.
This phenomenon is vividly illustrated by a hypothetical investment strategy that consistently selects the largest U.S. stock each year. The results show a significant underperformance compared to the S&P 500, challenging the assumption that market leaders maintain their growth trajectory.
The current market price of Nvidia, for instance, implies an astonishing 70% annualized earnings growth over the next five years. Such optimistic projections raise eyebrows among seasoned investors, who emphasize the rarity of sustained high growth rates in large-cap stocks.
Enthusiasts of Nvidia, particularly those captivated by the burgeoning AI revolution, may find this data perplexing. They envision Nvidia leading the AI wave, reaping substantial returns for years to come. However, a prominent financial commentator counters this sentiment, highlighting that widely accepted narratives are often already priced into the market. For Nvidia to meet these lofty expectations, its performance must surpass even the most optimistic forecasts, a feat that history suggests is improbable.
Even within the AI sector, the current frontrunner may not retain its dominance in the long run. A 2019 study by Research Affiliates focused on “top dog” stocks – those with the largest market caps in each sector across major global markets. The findings were striking: nearly 80% of these top dogs underperformed their respective sectors over the following decade, lagging behind the average return by a considerable margin.
This data suggests that the first company to reach the $4 trillion milestone may not be the obvious choice. It could be a dark horse, a company currently lower in the market cap rankings, poised to seize an unforeseen opportunity.
Consider the situation three years ago. Few would have predicted Nvidia’s meteoric rise, surpassing Apple’s market cap earlier this month. To illustrate the potential for dark horses, a thought experiment was conducted. Using Nvidia’s impressive three-year return, the future valuations of S&P 500 companies were calculated assuming the same growth rate. Surprisingly, eight companies beyond the current top three could potentially exceed $4 trillion by June 2027: Alphabet, Amazon, Berkshire Hathaway, Broadcom, Eli Lilly, Meta, Tesla, and Visa.
The journey to $4 trillion is not a foregone conclusion for any company. The market is a dynamic and unpredictable arena, where dark horses can emerge from the shadows and disrupt the established order. As investors navigate this ever-shifting landscape, it’s crucial to look beyond the obvious and consider the potential of underdogs. The race to $4 trillion is far from over, and the ultimate victor may surprise us all.
