The Things Actually Driving Stock Returns
When the stock market goes up like it did in July, the most frequent question I get asked is: "What do you think about the stock market?”
Since most investors are just looking for someone to confirm their suspicion that it is time to sell, my typical response is something like: “I love the stock market! I have no idea what it is going to do over the next days, weeks, months, or years, but nobody else does either. However, for long-term investors, which you and I are, the stock market is still the best game in town.”
Not content with my optimism, they will then follow up with whatever is scaring them most: “But what about [Fed / recessions / politics / war / China / national debt / elections]?”
To that one I just remind them that none of that is going to drive long-term stock market returns. Those are driven primarily by earnings growth, which is primarily driven by productivity growth and innovation.
To make the point, we can look back 50 years from 1972 – 2022. During that time the S&P 500 (excluding dividends) went up 32x. Why? Because earnings went up 35x. Why did this happen?
The productivity of the American worker skyrocketed. Adjusted for inflation, real GDP per capita rose from $26,140 to $60,400.
The innovation was astounding. Of the ten largest companies (by index weight) in the S&P 500 today, nine did not yet exist at the end of 1972! (Here is the list of the 10 largest companies in 1972 v today if you are interested in such things.)
If I had to guess, most of the largest companies of the year 2073 have not yet been created. And those next generation of great companies will operate in industries that are either in their infancy or don’t yet exist in 2023. It is my guess that the American worker will continue to get more productive, the number of consumers worldwide will continue to increase, and corporate earnings, and therefore the stock market, will continue to trend higher.
This is the source of my optimism, and this is why we invest in the stock market.