Question: How do you think an investor should distinguish between "a few big stocks have an overly high value" vs "a few big stocks are correctly valued at a high price because they have established a valuable position in the economy"?
It just depends on your investment philosophy; do you believe in paying top dollar today for the expectation of high future earnings (growth investing), or are you looking for something that has been around for a while and proven, has good solid cashflows, and selling at a reasonable price and will provide a known, steady expected return (value investing)?
Right now the market is willing to pay high premium for the promise of growth, but market history has shown that this is often a mistake and such lofty future expectations are unlikely to be met. The problems with growth investing are that
1. tomorrow's growth and higher earnings are far from guaranteed. This is simply the free market at work; excess profit provides an economic signal for other companies to move into that space and compete for those customers. They bring new idea and new ways of doing things that usurp the original, so it becomes difficult for today's leading companies to always remain ahead of competition. History has shown this to be the case; look at any number of companies from GE, IBM, Microsoft, Ericsson, Intel that mature and then eventually fall behind the next new innovator. Apple & Amazon are world leaders today, they probably won't be 20 years from now.
Therefore, if you bet on growth stocks, you are betting
against the long term economic forces of & profit signalling, supply & demand that are constantly churning away
Not only do profits tend to be normalized within industries, but also between industries. If one industry is loss making, firms will cease to operate in that industry and move to one where there are excess profits. These isalso self evident just looking at an individual level; you bring your particular set of skills to the market and there are market forces at work that mean you will get paid roughly similar if you work for a oil producer, software developer, or fashion retailer (ok, maybe not great examples, but my point is that it's your skills that primarily determine your wages, not the industry you work in).
2. Investors tend to get much more excited about growth and therefore overpay more than they do for steady value, and of course this is reflected in the price premium built into the share price of these stocks. If and when those target start getting missed (they always do, eventually, see point above) the revision of expectations can be savage, much more so than just a boring value stock missing earnings, which of course also happens