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There's an aspect of self-fulfilling prophecy to this. Higher demand leads to higher prices, and as more money flows into indexes the stocks in those indexes ar
by mark-r 10y ago
There's an aspect of self-fulfilling prophecy to this. Higher demand leads to higher prices, and as more money flows into indexes the stocks in those indexes are going to rise relative to the rest of the market. Thus their earnings become harder to beat.
- ap22213 10y agoWouldn't that knowledge be accounted for in the individual stock prices?
- smileysteve 10y agoOnly if people (and funds) continue to not invest solely in index funds, to which there would be economic incentive, because in the short term, those might perform better.
- ucaetano 10y agoNot exactly, as money flows to those stocks, they become overpriced, and will under-deliver returns in the future. On the other hand, other stocks will be undervalued, giving better returns in the future. So it is a self-correcting system, not a self-fulfilling prophecy.