Stock markets have never risen in a straight line. But since 1900, the United States has had the best-performing stock market in the world, with an annualized average return of 6.7% after inflation (Credit Suisse Annual Yearbook 2022 edition).
While historical returns cannot guarantee future returns, they might enlighten us on what to expect in the future.
Why does the stock market rise over the long term?
Many believe that the Fed controls the stock market, or that the Illuminati is pulling strings. While there are many factors influencing the stock market in the short term, in reality, the main reason the stock market goes up over time is that the economy is growing and companies are making more money.
Here are some simple statistics on the U.S. economy and stock market since 1928:
- The U.S. economy, as measured by the size of its GDP, has grown by an average of more than 3% per year, after inflation.
- Profits of S&P 500 companies have grown by an average of 2.62% per year, after inflation.
- The dividends of these companies have increased by an average of 1.72% per year, after inflation.
While there are many other factors that can impact stock market returns, a growing economy can create a positive environment for companies to operate in and potentially increase their profits.
Let’s look at one of the largest companies in the U.S., Apple.
In 2014, Apple sales totalled more than $180 billion, with a net profit of $39.5 billion. By the end of 2022, sales were approaching $400 billion and the company had net profits of nearly $100 billion.
Sales more than doubled while the company’s profit increased by 150%. During the same period, Apple paid out over $120 billion to shareholders in the form of dividends. During this period, its share price increased greatly.
It’s not the Illuminati that has driven Apple’s stock up over the past nine years. The price has gone up because Apple is simply making a lot more money than it used to. All things being equal, a company that generates more profits should be worth more.
Over the next 30 years, the economy will likely continue to grow, and it does not appear that it needs to grow at a very fast pace to produce good returns. In fact, an economy that grows at a more modest but stable rate may well be better for stock returns.
Being an investor in the stock market means that you participate in the profits through share ownership and cash flows of companies. You benefit from their innovation, investments and growth. If you believe that companies will continue to thrive in the future, you should invest in the stock market and not sit on the sidelines.
