Author James Playsted Wood once wrote: “The thing that influences the fair most is everything.”
The list seems endless when you start checking the factors that influence the stock market returns over time.
Newspaper heads, geopolitical events, economic growth, government policy, human emotions, investment positioning, interest rates, inflation, risky appetite, demography, quarterly winning reports and the list could continue.
In the years 2010, most people assumed that low interest rates and quantitative relaxation stimulated the stock market. In the early 2020 they were government spending. At the moment it feels like the AI tree is feeding everything.
It’s always something.
But if you really want to know what the American stock market is higher, look no further than income.
This becomes clear when you look at the composition of stock market returns per decade:
What drives the stock market during this bullmarkt?
Gain!
In the years 2010 we had an annual profit growth of almost 11%. The income in the 2020s only grew 10% per year. That is much higher than the long -term average of around 5% per year.
Consumers and companies spend money. That money is income for companies. After you have collected the costs of those sales, you will become a profit. Those profits are now higher, partly because the margins are higher:
It’s really that simple.
The profit growth does not guarantee a return with high shares. Profit growth was high in the 1940s (+9.9%) and the 1970s (+9.9%), but also inflation and there were extreme factors that ensured that the return was filled in in those decades.
The profit growth was not that strong in the 1920s (+5.6%), the 1950s (+3.9%) or 1980 (+4.4%), but annual returns were light in each of those decades.
So these relationships are not written in stone.
However, you can see that the lost decades of the 1930s and 2000 both had terrible profit growth of -5.6% and +0.8% respectively.
If you want to know why shares have risen over the past one and a half decade, look no further than profit growth.
It will not take forever because nothing does, but this bullmarkt has been supported by the company’s strong fundamentals.
Continue reading:
Expected efficiency on the stock market
1It should also be noted that one of the reasons why dividend yields are now lower than in the past is because back purchase (essentially the same as dividends in a different form) nowadays occur more often. Returning shares also increase the profit per share by reducing the number of shares on the open market.
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