Positive news may push prices higher, but these changes are not predictable
Investors must think twice about chasing the biggest stocks based on market capitalisation. While companies that grow to become some of the largest on the US stock market may initially have impressive returns, a study from 1927 to 2022 found that these stocks tend to lag behind the market after joining the top 10 largest by market cap.
Expectations about a company’s prospects
Interestingly, the study showed that the average annualised return for these stocks over the three years before joining the top 10 was more than 25% higher than the market. However, three years after joining the top 10, these same stocks were, on average, underperforming the market. This trend continued five years out, with the gap between their performance and the market’s performance widening.
It’s worth noting that expectations about a company’s prospects are already reflected in its stock price. While positive news may push prices higher, these changes are not predictable.
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