I've read the books about investments like "The Simple Path to Wealth" and it makes sense that companies come and go in and out of the index funds based on how their business is doing and trust of the people, performance, reputation, sales.
Or rather *MADE* sense, back those days when not your every neighbor was an "investor" with a collection of stocks on their apps. And those investors really were analyzing and investing in things doing good and sold those doing not so well.
Now coming to our days: people just invest monthly into MAG7/S&P500/etc doesn't matter are they doing good or bad(just look at Tesla with their fantasy valuation). Americans do their 401k, Europeans with their pension funds and brokers who encourage to put XXX every month into stocks.
This is a huge and constant inflow of money. That is *NOT* based on any analysis, but simply because everyone and their dog are doing this, trying to escape inflation losses and get rich. Price-to-earnings (P/E) ratio for Mag 7 is now about 31x. This is an enormous inflation.
It's common to say crypto is based on trust and a ponzi. Now could you shed a light, how stock markets are different in a broad sense, if people from all around the world simply put money there every month in a dream of getting richer thus inflating every stock and making richer those who entered earlier?
**EDIT**
Thanks to everyone for the answers, maybe I should've worded it clearer that my misconception/assumption I was trying to present is that if everyone is just buying the index (like the S&P 500), they aren't looking at the individual stock's value. The fear is that this passive buying could artificially inflate prices without any fundamental analysis, making it seem like a closed loop - a "Ponzi scheme" where the only buyers are the index funds themselves.
u/[stuporman86](https://www.reddit.com/user/stuporman86/) and others brought great points here, that deny that and I wanted to summarize it here:
\- funds vs direct holdings: even though passive funds recently exceeded 50% of the money held in investment funds, funds themselves represent a minority of total market investment. The largest pool of capital is still held in direct individual stock holdings. This large pool of direct holdings means a significant portion of investors are still actively researching, selecting, and trading individual stocks and it' is crucial for setting prices based on value, not just automated buying.
\- economic studies suggest that a "slim minority" of informed, active traders is sufficient to ensure good price discovery