A 120-year in-depth study! Bridgewater: How did the leading US stocks rise and fall?

The main theme of the US stock market in the past eighteen months has been large-cap technology stocks, whether it's the "Big Five" or the "Seven Sisters", their continuous surge has dominated the index trend. Now, as tech giants continue to hit new highs, Apple's market value surpassed $3.5 trillion last week, becoming the world's largest company by market capitalization. Can these tech giants have the last laugh?

Bridgewater Associates recently provided a good reference answer.

In June, Bridgewater Associates released a report studying the rise and fall of leading US stocks since 1900, and came up with a series of interesting conclusions:

1. The rise of industry leaders is often determined by two main factors: first, having a first-mover advantage in a rapidly growing industry and being able to innovate quickly; second, having a strong moat to maintain this advantage. This moat can slow down the erosion of a company's market share over time.

2. The reasons for the decline of industry leaders are also straightforward: if a company loses the ability to innovate continuously, or fails to sustain their moat, it usually leads to the eventual decline of the industry leader, as new, faster-growing companies will seize their market share and eventually replace them.

3. Government regulation often influences the fate of industry leaders.

For example, at the beginning of the 1900s, the railway industry was vibrant and dominated the US economy until the rise of automobiles and airplanes broke the monopoly of railway industry leaders.

Similarly, from 1930 to 1960, chemical industry leaders rose with the invention of plastics, until the US underwent a crucial shift from manufacturing to services.

Another typical example is the oil giants that have been dominant for nearly a century, now facing challenges from the rise of the new energy industry and the emergence of US shale oil.

Today, tech giants are leading the way in the US stock market, but no one can be sure how long their advantage will last. They may be on the brink of collapse, or they may be at the peak of the wave. No one can remain dominant forever, which also indirectly proves the inherent vitality of the US stock market. Over more than a century, crises have caused a change of guard among industry leaders time and time again, with the only constant being that the market has always been progressing.

Below is the full text of Bridgewater Associates' report:

Throughout history, certain companies have always dominated the stock market, but the decline in innovation capabilities will eventually make it difficult for them to maintain a leading position in the long term.

A notable feature of the current US stock market environment is that a few companies are dominating the market trend. The top 10 largest companies in the US by market capitalization account for almost one-third of the total market value, a level of concentration we have not seen in decades. These leading companies hold such a large share in the market because they have achieved remarkable success, and the market believes this situation will continue. Throughout history, market leaders have always existed: a century ago, US railway companies also held over one-third of the market share, but they eventually fell due to their inability to adapt to structural changes. The same goes for chemical industry giants, who rose with the invention of plastics but slowly declined with failed innovation and changing demand patterns In this report, we review the rise and fall of leading companies in the US stock market over the past 120 years to reveal how these mechanisms may play out today. We study the stock market leaders of the past 120 years, how long their dominance lasted, and the trends that led to their decline. The graph below shows the rise and fall of the largest companies by market capitalization in different eras (each gray line represents the market share of the leading company at the beginning of each era).

Some market leaders successfully maintained their peak position for decades, while others were eliminated shortly after their rise. Although the duration of dominance of leading US stocks in different periods varies, the commonality is that the vast majority of leaders are eventually defeated by newly emerging competitors, with some companies declining rapidly; some companies still influential today, but in decline. The specific situation of each company is slightly different, and today's strong leading companies may temporarily maintain their dominant position (especially considering their strong competitive moats and robust balance sheets, giving them the opportunity to invest in new innovations and acquire potential competitors), but this has also been the case for past companies. We can say with great certainty that after losing creativity (as reflected in the graph above), it will be difficult for companies to maintain a leading position, and over a long enough period, only a very few companies can sustain success.

Next, we present the results shown in the graph above in tabular form. Starting from 1900, at the beginning of each decade, we show the market share changes of each batch of leading companies in the following years. In the subsequent one or two decades, about half of the market leaders perform worse than the market, falling out of the top 15 leading positions. If we extend the time span, almost all leaders will be eliminated.

Among these leading companies, their rise is often determined by two major factors: first, having a first-mover advantage in a high-growth industry and being able to innovate rapidly; second, having a strong moat to maintain this advantage. This moat can slow down the erosion of a company's market share over time.

The erosion of either of these two driving factors typically leads to the eventual demise of a leading company, as newly emerging, faster-growing companies will seize its market share and eventually replace it.

Many companies among the leading companies can maintain a leading position for decades mainly because they have the ability to innovate continuously, seize new revenue growth opportunities in a timely manner, and maintain long-term competitive barriers. Regulation also plays a certain role in this process, as it can either make or (truly) break a leading company. Below, we will review some important historical cases, highlighting key drivers in each leading company's lifecycle

Monopoly Leaders in the Railroad Industry in the 1900s to 1930s (Pennsylvania Central Railroad Company, Union Pacific Railroad Company, New York Central Railroad Company, etc.)

Railroads were a key driver of rapid industrialization in the early 20th century, providing the only reliable way to transport materials and finished goods across the United States. However, starting in the 1920s, with the U.S. government's investment in interstate networks and the increasing reliability and affordability of automobiles, competition from other new modes of transportation (mainly trucking, followed by air transport) began to erode the revenue of railroad companies. This also undermined the competitive moat of railroad companies: now there were alternative ways to transport goods across the U.S., and compared to railroads, trucking faced less regulatory resistance in pricing and route determination.

Chemical Industry Leaders in the 1930s to 1960s (DuPont and Union Carbide)

In the 1930s, DuPont and Union Carbide emerged as leaders in the chemical industry with new technologies in plastic manufacturing. Over the following years, the demand for plastics multiplied due to the booming need for mass-produced goods and the surge in demand for nylon and neoprene rubber during wartime. DuPont and Union Carbide maintained their leadership positions for decades, largely benefiting from their product categories riding long-term growth trends. However, as the U.S. economy gradually shifted from manufacturing to services, the growth in demand for chemical products slowed down, and the chemical industry was eventually replaced by faster-growing industries in the 1970s to 80s.

Automotive Industry Leaders in the 1920s to 1960s (The Big Three: General Motors, Ford, and Chrysler)

In 1900, only about 1% of the U.S. population owned a car. By 1950, over 50% of Americans owned cars, reaching 75% in 1960. This massive expansion was a huge driver for major automakers, transforming them from a large number of independent small workshops to large automotive giants capable of mass-producing cars. The ability to achieve mass production at relatively low costs (through economies of scale and technological innovations like assembly lines) created key barriers to entry into the automotive industry, allowing the U.S. Big Three automakers to maintain their market share long term. However, by the 1960s, the tide began to turn: as car ownership rates stabilized, the U.S. automotive market became more saturated; new Asian competitors caught up with the wave of automotive technological development, engaging in price wars with U.S. car brands and weakening the competitive advantage of U.S. automotive giants.

Oil Industry Leaders from 1900 to Present (Exxon, Mobil, Chevron, Marathon Oil)

Oil companies have been long-standing leaders, leveraging expanding market sizes and strong structural barriers to maintain competitiveness over more than a century. In 1900, the largest oil enterprise - Standard Oil Company underwent a series of splits and mergers, eventually becoming ExxonMobil today. Over a century, with the continuous increase in electrification and car ownership rates, the demand for oil has seen unprecedented sustained growth, benefiting the oil giants immensely They can also use their monopoly power to establish economies of scale, engage in price wars globally, and break through antitrust restrictions with the merger of Exxon and Mobil in 1999. For decades, the oil industry has always held the leading position, only starting to lose market share in recent decades, facing challenges including the transition to new energy sources and the emergence of new crude oil supplies with the advent of the U.S. shale oil market.

Telecom Leader from 1930 to 2000 (AT&T)

Today's U.S. telecom giant AT&T is a descendant of Bell Telephone Company, the first company to launch telephone services in the United States at the end of the 19th century. With first-mover advantage, ownership of the landline network, and strong vertical integration, AT&T's monopoly created huge industry barriers, forming an exceptionally strong competitive moat that lasted for over 70 years until it was broken up by antitrust laws in 1984. Recently, 1) the rise of mobile networks and the decline in the importance of landlines; 2) antitrust laws weakening the long-term entry barriers in the telecom industry; 3) leveraging these changes, new mobile networks and internet companies continue to emerge, ultimately weakening AT&T's competitive moat and causing its returns to fall below market levels.

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In the past two decades, information technology companies (including computer software, hardware, and internet services) have dominated the list of leading enterprises, as this relatively new market has experienced rapid long-term expansion driven by technological innovation unlocking new business opportunities. The dot-com bubble in 2000 showed that the market may be overly forward-looking, lacking fundamental support for future profit growth, and recent market share expansion has been mainly driven by rapid profit expansion. In the past two decades, the turnover rate of the top 15 companies by market capitalization has been very high, as innovators have overturned long-standing corporate groups and competed in the market (internet services and computer software) with fewer structural entry barriers.

The reason why today's IT leaders can temporarily maintain their leading position, outperforming the market, is due to various factors: strong competitive moats (network effects, data collection advantages, advanced technological capabilities), incredibly strong balance sheets that can provide funds for new enterprises to leverage new long-term revenue growth points, and the ability to acquire and internalize the capabilities of small innovative companies before they develop into challengers, to a degree that is unprecedented. At the same time, antitrust regulations threaten companies like AT&T and Standard Oil, leading to their breakup and dismantling, a possibility that could also happen today The technological revolution, such as artificial intelligence, may rapidly change the balance, and for those companies that cannot adapt, the utility of their services will be greatly discounted, just like the introduction of railways after the invention of cars or fixed telephones after the introduction of mobile networks. IBM's position also once seemed insurmountable. Today, IBM's market value accounts for less than 0.3% of listed companies in the United States, less than 1% of all technology and hardware companies, and IBM has been replaced by today's technology leaders.

In terms of pricing, we find significant differences among the current leading companies -- in some cases, valuations seem consistent with the strong prospects of these companies, while in other cases, excess returns may appear to exceed pricing. The table below shows the current leading enterprises, their current market value and profit share, and analysts' estimates of long-term growth.

Currently, one issue that investors need to consider is that the proportion of current leading companies in most investors' portfolios is higher than ever before. Investors often continue to buy outstanding performing companies because stock holdings are often managed with reference to market capitalization, and outstanding performing stocks will increasingly dominate the entire market. Today, this situation is more severe than ever before -- partly due to the concentration of leading companies in the U.S. market, the significant weight of the U.S. market in global benchmarks, and the prevalence of indexing. In a typical U.S. market-cap weighted investment portfolio, over one-third of the holdings are current technology leaders, and in a global investment portfolio, this proportion is close to 20%, the highest in over 50 years. As an alternative hypothesis, considering the decline in performance after the loss of innovation by leading companies over the past century, equally weighted investment portfolios in the future may have higher and more stable returns than market-cap weighted investment portfolios.

Appendix -- Leading Companies Over the Past Century

Below, we list the leading U.S. companies over the past century in ten-year intervals for reference, highlighting key dynamics of each decade. Note: Company names are based on today's names (for example, ExxonMobil was essentially known as Jersey Standard Company before 1972, but is listed as ExxonMobil in each decade in the table below).

1900 and 1910 -- The early 20th century was mainly dominated by railway monopolies (such as Pennsylvania Central Railroad Company, New York Central Railroad Company, etc.) and oil giants, including Standard Oil Company (now ExxonMobil) and Marathon Oil. Railways were at the core of American industrialization, enabling unprecedented levels of speed and quantity in goods transportation. In the forty years prior to this, with the rapid expansion of the railway system, competition among railway giants was fierce, and by the 1990s, these giants had consolidated into several powerful monopolies. As mentioned above, oil companies benefited from the growing demand and high barriers to competition 1920s and 1930s -- Rise of Oil Giants, while Railroad Monopoly Enterprises Were Eliminated (as new transportation methods eliminated their competitive moats). New leaders, including American Telephone and Telegraph Company (AT&T, the dominant force in the construction of the American telephone network) and the automotive conglomerate General Motors (benefiting from the expansion of American household car ownership and improvements in manufacturing technology), emerged in the 1920s.

1930s -- Chemical Manufacturer DuPont made new advances in materials science (such as the invention of nylon and polytetrafluoroethylene), while General Electric (founded in the late 19th century) pioneered the television broadcasting business in the late 1920s and developed aircraft superchargers during World War I, which became indispensable equipment in the following decades, especially before World War II.

1940s to 1950s -- Many leading companies that emerged in the 1920s and 1930s (such as AT&T, General Electric, DuPont, Exxon, General Motors) maintained their leading positions for decades. Benefiting from the demand for materials during the war and scientific innovation, the dominance of the chemical industry continued -- in the 1940s, Union Carbide Corporation rose to the top of the market alongside DuPont. The strong consumer power after World War II and the rise of consumer culture led to the emergence of the first large retailer, Sears, which rose to the top in 1950.

1960s to 1970s -- The post-war optimism of the 1950s inspired a wave of creativity and progress, especially in the field of computers and electronic products, leading to the rise of technology companies in the 1960s and 1970s (IBM, Xerox, Kodak), replacing some of the previous industry leaders. In particular, as demand growth slowed down, leading companies in the chemical industry gradually declined (DuPont and Union Carbide Corporation faced reputation issues as new scientific research linked their materials to health problems), and the oil industry also lost some of its dominance at the beginning of this decade. The automotive industry still dominated in the 1960s, with Ford and General Motors ranking in the top 10, but by the 1970s, due to new competition and slowing demand growth, the automotive industry began to decline gradually.

1980s -- In the 1980s, influenced by the inflation of the past decade, oil companies held overwhelming advantages in the market. General Motors remained at the forefront, but was pushed out of the top position in the late 1970s/early 1980s economic recession. Sears was left behind by other retailers (such as Walmart, Kmart, etc.) that attracted customers with low prices, while families struggled under the pressure of high inflation 1990s-- In contrast to the inflation of the 1980s, the 1990s saw most oil giants drop out of the top ten, with Exxon and Amoco being notable exceptions. Despite softening oil prices, Exxon's performance in the 1980s continued to rise as the company significantly cut expenses to cope with declining revenues and increased stock value through large-scale buyback programs. General Motors faced increasing foreign competition and declining sales, while all other non-oil industry leaders (IBM, General Electric, AT&T) remained at the forefront. The pharmaceutical industry (Merck and Bristol-Myers Squibb) began to emerge, thanks to the shift towards blockbuster drugs and a growing understanding of science, leading to a record number of drugs entering the market (e.g., Merck's hepatitis B vaccine approved in 1986).

2000s-- The excitement brought by new technologies and the tech bubble propelled many new tech companies (Microsoft, Intel, Cisco, etc.) to the top. Other non-tech industry leaders were mostly existing ones, still maintaining their positions near the top of the market (General Electric, Exxon, and Merck, although the latter two's rankings declined). Walmart followed in the footsteps of the large retailer Sears, making its debut. The two major financial institutions, Citigroup and Travelers Group, merged, with Citigroup becoming the first bank to make the list since 1930.

2010s-- During the financial crisis, retail companies (Walmart, Procter & Gamble, Johnson & Johnson) and companies with strong balance sheets (Berkshire Hathaway, Alphabet) dominated the market. Apart from large tech companies (with strong balance sheets and stable long-term growth) and oil companies (amid tight oil markets), cyclical companies were not among the market leaders. General Electric almost faced bankruptcy due to losses in its GE Capital business and was on the verge of exiting the market.

2020s-- After a decade of rapid growth in smartphone and social media usage, people have generally shifted towards more online consumption through platforms, with dominance from internet services (Meta, Alphabet), cloud service providers (Microsoft, Amazon, Alphabet), and tech hardware companies (Apple). Additionally, companies in advantageous positions during the shift to online consumption and home delivery have also made it to the list (Walmart, Amazon, Visa)