Which companies will lead the next generation of disruptors?

Disruption is nothing new for the economy—or the stock market.

From the railroads of the late 1800s to the oil giants of the 1900s, to today’s tech behemoths, innovation and technological change have catalyzed secular shifts in markets. Along the way, they’ve delivered tremendous opportunities to investors. 

The pace of change seems to be accelerating. In 2006, no one owned an iPhone, Facebook had just opened up to non-college students, and Amazon sold books. Fifteen years later, Apple, Meta (formerly Facebook) and Amazon, three of the largest companies in the world, are worth almost USD5 trillion, providing dramatic returns for early investors.

What companies might rise to prominence over the next 15 years? Where should investors look to capture the potential gains of the next generation of disruptors? We look for these prospects in our three megatrends of digital transformation, healthcare innovation and sustainability.

Lessons from past disruptors

In looking ahead, it helps to first look back to consider what makes today’s giants so valuable. They not only disrupted massive industries, they also sustained significant growth rates and free cash flow margins across business cycles. We focus here on five of the largest companies in the U.S. market: Amazon, Apple, Google (now Alphabet), Facebook (now Meta) and Microsoft.¹

Apple redefined technology hardware and personal communication. (Do you even remember when smartphones were not indispensable?) Microsoft dominated business computing, transitioned to a lucrative and consistent subscription revenue model, and cultivated a growth engine from cloud computing. Amazon disrupted the entire retail sector. Google became the front page of the internet, while Facebook leveraged powerful network effects.

Over the last 15 years, those companies generated a median revenue growth rate of 22.5% (versus 3.1% for the S&P 500)² with a free cash flow margin that is double the market. Their stocks have outperformed the S&P 500 by ~19 percentage points annually.³

Digital transformation, healthcare innovation, sustainability

Our three megatrends of digital transformation, healthcare innovation, and sustainability offer tremendous potential. Indeed, new entrants are already challenging the current behemoths. Importantly, technological innovation is blurring the lines between traditional sectors, which should lead to a broader opportunity set for investors seeking disruptive businesses.

The automobile industry is one of many examples of digital transformation reshaping a traditional industry. Importantly, models such as Bloomberg New Energy Finance’s suggest a slower pace of adoption for electric vehicles (EVs) than for past adoption of cell phones, microwaves or air conditioning. There are barriers to EV adoption (such as charging infrastructure), but we could be at an inflection point, with traditional manufacturers joining new entrants in focusing on EVs.

A side effect of innovation in the automotive industry: a boom in demand for semiconductors. EVs require up to 19x the semiconductor content of traditional internal combustion engine cars,⁴and semiconductor revenue from autos is expected to grow at a 20% compound annual growth rate through 2025.⁵Semiconductors are a key enabling input, not only for autos, but for most durable goods that consumers purchase (from phones to dishwashers). As a result, semiconductors could be a key beneficiary of an increasingly digitized world.  

Innovation is also disrupting the healthcare sector. Machine learning and artificial intelligence are accelerating drug discovery. Some companies use software to integrate data and technology into clinical trials to expedite drug development. Precision medicine uses a patient’s full medical profile (including genetic data) to create more customized treatments for individuals. As the aging global population spends more on healthcare, disruptive companies will likely benefit.

Innovation will not only help in the fight against climate change, but also enable us to adapt to a changing world. Estimates suggest that USD4 trillion–USD6 trillion of annual investment is needed this decade⁶ to keep pace to decarbonize the global economy, almost double the current rate. Areas of focus include electrifying transportation, making buildings and appliances more energy-efficient, renovating electricity grids and developing new low-emission fuels.

In many ways, the three megatrends are interconnected—linked by their ability to harness the power of artificial intelligence and machine learning. From next-generation vehicles to preventative healthcare, to factory automation, to financial technology, computers’ ability to solve immensely complex problems could enable an exponential wave of new technologies that alter our everyday life.

Of course, there is a downside to disruption—what Joseph Schumpeter famously called capitalism’s “creative destruction.” Once-dominant companies can lose share in dramatic fashion, as discussed in J.P. Morgan Asset & Wealth Management’s Agony and Ecstasy series led by Michael Cembalest. Even as we look to be early investors in disruption’s winners, we want to avoid (or make an early exit from) disruption’s losers. 

How to invest in innovation

To invest in potential disruptors, you’ll want to access both private and public markets. In private markets, look for managers that can potentially identify companies at their earliest stages (and lowest valuations). 

In public markets, you’ll want to rely on seasoned active managers. Find those who can differentiate between true secular growth opportunities and superficial growth traps, and identify management teams that have the discipline to maintain impressive balance sheets and cash flows. We think innovative companies offer great opportunities, but we are not willing to pay any price for growth, especially as we move further into the middle of the economic cycle.

Finally, just as companies are focused on new technologies, investors could also consider using new investing methodologies that use artificial intelligence to identify companies exposed to a particular theme.

Even as we think about what the next generation of dominant companies might do, we also acknowledge that investors need to keep an open mind. In 2006, it would have been hard to imagine how ubiquitous Facebook or iPhones would become. Some of tomorrow’s most dominant companies may not even exist yet. Your J.P. Morgan team can help you position your portfolio for the future.

¹ Factset. Data as of January 19, 2021.

² Factset, J.P. Morgan Private Bank. Data as of December 21, 2021.

³ Factset, J.P. Morgan Private Bank. Data as of January 5, 2022.

⁴ BoFA Global Research. Data as of 2019.

⁵ Gartner. Data as of 2019.

⁶ Goldman Sachs, “Green Capex: Making infrastructure happen." Data as of October 2021.

Index definition

The Standard and Poor’s 500 Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The index was developed with a base level of 10 for the 1941–43 base period.