Stocks2: S&P earnings growth

In an earlier post I showed that over the long-term, 10-year inflation-adjusted price returns for the S&P 500 and DJIA averaged low single-digits. However, that final chart was the only one I showed on a real basis; all else was shown on a nominal basis.

So, lest I be accused of throwing in an apple with a bunch of oranges, I'll show the comparable chart on a nominal basis here:



So, the picture looks little different: about 2% higher on a nominal basis, unsurprisingly, than on a real (inflation-adjusted) basis.

Another potential criticism of the previous post is that I used NIPA Corporate Profits as a proxy for S&P 500 earnings. Of course, these are two different entities, so may not bear a consistent relationship to each other. So, to redress that problem, I'll look at S&P earnings directly.

The point I was making in the last post is that corporate profit growth should and would, over the long haul, regress to approximately the same level as nominal GDP growth. I showed that with NIPA corporate profits that this was historically the case.

As the following chart shows, though there were deviations at times, S&P earnings growth has been reasonably well-correlated with NIPA corporate profit growth:

More to the point, as the following chart shows, S&P earnings growth has not generally kept pace with nominal GDP growth:

While there were certainly periods like the 1990s and 2000s when S&P earnings grew faster than GDP as profit margins improved, on average, the periods when S&P earnings growth trailed GDP growth dominated the periods when the converse was true.

So, to reiterate, to believe that stock prices should grow faster than nominal GDP growth is to believe either that corporate earnings growth can grow sustainably faster than GDP, which is contrary to historical evidence, and/or that P/E multiples will continuously expand, a topic that will be examined in a later post.