Well, here is some strange news: as of just over a month ago, we are officially closer to the year 2050 than to the year 2000. Here’s a by-no-means-comprehensive list of things that did not exist in the year 2000:
iPhones (or any smartphone)
3G internet
YouTube
Uber
Streaming
AirBnB
Tesla
Wikipedia
Spotify
Zoom
The Apple app store
Venmo
Before we know it, we will realize that the year 2075 is nearer chronologically than the year 2025. What products and services will we rely on daily in 2050 that we couldn’t fathom living without in 2025? Which of the products and services listed above will we think of as relics of the past? Some of the items listed above will be thought of in 2050 the way we think of VCRs and floppy discs today…
Trying to predict such things is foolish. Millions of words have already been written and will continue to be recorded opining on the shape of the future. A.I., robotics, etc. The natural next step is to determine how to profit from one’s perceived clairvoyance. It’s all a waste of time. No one knows what the future holds. We feel comfortable making two – admittedly unspecific and happily unoriginal – predictions:
(a) Humans within a free-market economy will continue to innovate.
(b) Therefore, there will be a long list of products and services intimately integrated into the fabric of our daily lives in 2050 that have yet to be conceived; while many of the products and services we consider indispensable today will become relics of the past. This is the paradigm of creative destruction, and it is one of the most powerful forces in human history.
How do you suppose investors felt in the year 2000 when they realized they were closer to the year 2025 than the year 1975? The top ten stocks in the S&P 500 in the year 2000 (in order by market capitalization) were General Electric, Exxon Mobile, Pfizer, Cisco, Citi, Wal-Mart, Microsoft, AIG, Merck, and Intel. The top ten stocks in the S&P 500 indicate some of the biggest winners in the markets among the largest companies in the country at a given point in time. If you would like to determine the stocks investors were excited about during a particular year, a search for the S&P 500’s ten largest holdings during that year will give you a pretty good (albeit not comprehensive – there were a litany of smaller market-cap “dotcom” stocks” people were trading like crazy in the late 90s) idea. How did long-term investors in 2000 allocating their capital to the largest, most dominant stocks in the market fare over the following twenty-five years? Here are the annualized total returns for each of the ten largest S&P 500 constituents at the turn of the century through year end 2024…
Microsoft is the only company that remains one of the ten largest in the country. It is also the only constituent that continued its run of outperformance, handily beating the index by ~2.5%/year. An investor in any of the other nine largest stocks in 2000 was disappointed by 2024. The average return in the first quarter of the 21st century for the ten largest S&P 500 constituents was 2.17%. That is less than inflation, which averaged 2.56% annually during that period. I am going to repeat that in case you missed it:
The average return during the first twenty-five years of the 21st century of the ten largest stocks in the S&P 500 index failed to keep pace with inflation.
It is not a story of epic collapses. Wal-Mart and Exxon are in the top 20 of the S&P 500 today. GE and Cisco are in the top 30. Merck is 44th, Citigroup is 56th, Pfizer is 74th, Intel is 118th, and AIG – despite its horrifying returns the last quarter century, is the 216th largest publicly traded stock in the country today. None of these companies was exposed as a corporate fraud like Enron or innovated out of existence like Kodak. Each of these ten companies continues as a massive enterprise one quarter of a century later – all remain in the top half of the S&P 500 and eight are in the top 100 largest publicly traded companies in the country. Yet an investor who allocated his portfolio equally to these ten behemoths watched his capital diminish in real (inflation-adjusted) terms over the last twenty-five years.
Stock prices are primarily a function of expectations about the future. Investors don’t buy companies for a claim on last quarter’s cash flows – those are already accounted for. They are buying claims on next quarter’s (or year’s or decade’s) profits. The ten largest companies in 2000 saw their stock prices run up throughout the nineties as investors expected larger and larger profits in the 2000s and 2010s. With the exception of Microsoft, those profits failed to meet investors’ very lofty expectations – particularly comparatively to other market participants. It is much easier to imagine the limitless potential profits for Wal-Mart when Amazon is a fledgling online bookseller, and the majority of households require a visit to a library or café for access to the internet. Today, the outlook for Wal-Mart’s future profits is decidedly less appealing. Of course, one day we will say the same of Amazon.
Today the ten largest stocks in the S&P 500 are (in order) Nvidia, Microsoft, Apple, Amazon, Meta, Broadcom, Alphabet (Google), Tesla, Berkshire Hathaway, and JP Morgan. Each business is profitable, but they are the largest businesses by market capitalization not merely because of profits today but because of investors’ collective expectation of profit growth in the coming quarters, years, and decades.
In 2000, Google was a two-year-old private company. Nvidia IPO’d the year previously as a company making graphics chips for video games. Amazon was an online bookstore waiting for its customers to get consistent access to the internet. Apple was seven years away from launching the product that changed the world. Meta, Tesla, and Broadcom (in its current post-merger form) had not yet been founded. The best companies of today are largely either unrecognizable from twenty-five years ago or were nonexistent. When considering portfolio construction for long-term investors – those investing for 2050 and beyond – we return to our two predictions above. Humans will continue to innovate, and creative destruction will relentlessly drive the economy forward. The list of the largest, most successful companies in 2050 will almost certainly be starkly different from the list in 2025.
Invest accordingly.
Sean Cawley, CFP®
Sources:
YCharts
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This commentary reflects the personal opinions, viewpoints, and analyses of Resolute Wealth Management. It does not necessarily represent those of RFG Advisory, clients, or employees. This commentary should not be regarded as a description of advisory services provided by Resolute Wealth Management or RFG Advisory, or performance returns of any client. The view reflected in the commentary are subject to change at any time without notice.