How will companies continue to compound growth with such huge numbers?

[One]

Corporations have grown rapidly compounding their gains for years while the average consumers wages have only grown at a slow pace. Now that the corporations have to keep compounding on such huge numbers where will the growth come from? QE is ending and the fed is raising rates?  Are the facts changing and are you looking into more conservative allocations?

[nereo]

For large corporations, growth is typically from overseas. There's a largely undertapped and growing market of humans entering into middle class.  These are people who formerly had zero discressionary funds.  The Brookings Institute estimates there will be an additional 1 billion people in this niche by 2022 (in four years) and another billion 6 years later. 
At the same time the standards for middle class are rising globally. All this adds up to tens-of-trillions of dollars in GDP expansion every few years.  Best estimates are that the global economy is expanding at ~4%/year.

THen there's efficiency gains, particularly from those poor countries.  A guy building huts with a shovel and hammer isn't terribly efficient (but is the way ~half of the world builds still builds home).  As these economies graduate to mechanized processes the productivity goes up by an order of magnitude, or more.

[One]

Okay, but if the global economy is expanding at 4% but the stock market has been averaging 10% how does the diverging compounding effect work out?   

[wageslave23]

Okay, but if the global economy is expanding at 4% but the stock market has been averaging 10% how does the diverging compounding effect work out?

With stocks you are getting a premium to assume risk, plus inflation is another ~3%.  Plus the actual inflation adjusted return for the market the last 20 yrs is only about 5.7%
https://dqydj.com/dow-jones-return-calculator/

[nereo]

Okay, but if the global economy is expanding at 4% but the stock market has been averaging 10% how does the diverging compounding effect work out?

You are conflating global GPD with corporate profits.  They are correlated but two separate metrics. In other words, GDP expressed as a percentage ≠ market gains.
The 'market' is whatever investors are willing to currently pay for a piece of each company listed on a given stock exchange.  GDP is everything produced expressed as a total monetary amount. There's no reason a 4% increase in GDP should have a 4% increase in the market.

[FIRE@50]

I think you could have asked this question at almost any point since the creation of the modern corporation. One of the great advantages of being an investor in broad indexes is that you don't have to worry about where the growth is coming from. All you have to know is that it is coming from somewhere and if/when those corporations are publicly traded, you will profit from it.

What is that famous story about the guy that wanted to close the patent office because nothing new could possibly be invented? What year was that?

[PDXTabs]

As a slight aside I would recommend this article: On GDP vs Equity Returns, Bill Gross Is In Fact Right... With A Twist. It makes my head hurt and no, I can't explain it to you.

[One]

As a slight aside I would recommend this article: On GDP vs Equity Returns, Bill Gross Is In Fact Right... With A Twist. It makes my head hurt and no, I can't explain it to you.

Thanks for the link, was helpful

[BicycleB]

I liked that link. The idea that people do not reinvest all of their dividends, thus deviating from the model that one might have assumed, is helpful to understand.

Fwiw, I have pondered this myself verrry unprofessionally. It seems to me that equity does not have to match GDP growth because it is not the only asset class in the nation's capital base. Even if capital as a whole maintains a fixed share of GDP, particular asset classes within the broader category of capital can have different rates of return. It's not the rate of return on stock equity that needs to equal GDP over time, it's the return on all capital.

Consider the example where the national economy's capital consists of bonds and stock. Suppose that two thirds of the capital is in bonds and one third in stock. Suppose that bonds return 1% above inflation, stock 5.5%. What is the nation's return on capital?

.01(2/3) + .055 (1/3) = .025 = 2.5%, a very reasonable approximation of long term US GDP growth.

[Daisy]

I've wondered as well, but this article from JL Collins stock series explains how index investing solves this problem. The index fund is a self-cleansing mechanism.

https://jlcollinsnh.com/2012/04/19/stocks-part-ii-the-market-always-goes-up/

[Capt j-rod]

They will grow the same as the federal debt... On paper with a pencil. Very few companies have hard assets. Everything is leased, rented, or doesn't even exist. There are no assets to back the value of the company. Just like a fiat currency, aka U.S. dollar, their stock is worth what someone will exchange for it on any given day. We still have to play the game, but we no longer have any money. We get an email from a bank every month that has numbers on it. We swipe a card and they give us food and goods. Then numbers change. Sometimes up sometimes down. Sadly we have to play their game. Cash isn't worth the paper it's written on and there is nothing other than trust that it is good. Ask Venezuela. So how will they double? The same way they drop... On paper with a pencil. Or in today's case via email.

[marty998]

They will grow the same as the federal debt... On paper with a pencil. Very few companies have hard assets. Everything is leased, rented, or doesn't even exist. There are no assets to back the value of the company. Just like a fiat currency, aka U.S. dollar, their stock is worth what someone will exchange for it on any given day. We still have to play the game, but we no longer have any money. We get an email from a bank every month that has numbers on it. We swipe a card and they give us food and goods. Then numbers change. Sometimes up sometimes down. Sadly we have to play their game. Cash isn't worth the paper it's written on and there is nothing other than trust that it is good. Ask Venezuela. So how will they double? The same way they drop... On paper with a pencil. Or in today's case via email twitter.

FTFY