S&P500 Earnings

[frugal_c]

One thing that is a little concerning when investing in the stock market is the very slow growth of inflation adjusted earnings.  I have never really had a good look at it before but it appears that over the last century, earnings have only grown by 1.5% per year ahead of inflation.  Even this number appears impact by the last 15 years or so.

Here are the inflation adjusted 10 year avg earnings (basically the E10 component of shillers PE 10) for the past century of the S&P 500 index.

1917 : 18
1927 : 14
1937 : 14
1947 : 15
1957 : 24
1967 : 31
1977 : 37
1987 : 38
1997 : 41
2007 : 63
2017 : 81


I am really not trying to be a troll here but I find these numbers very concerning.  I have significant amounts in the market and I don't know that there is a better option but these numbers imply that we should be very cautious with the market.

Just a few observations from this data.  It took 60 years from 1917 to 1977 for the earnings to double after inflation.  From 1977 to 1997, during this great stock bull market earnings went up by about 10% inflation adjusted, in total.  10% IN TOTAL, over 20 years, 20 of the best years??????   From 1917 to 1997 or an 80 year period, earnings only went up by 110% when accounting for inflation!!??!! 

Basically what this is telling me is you should not rely on the stock market to provide ANY capital gain beyond inflation since the growth rate is so low and since you can have decades long period with no earnings growth.  I would just count on price appreciation matching inflation, which is nothing to be ashamed of, inflation is a real problem to overcome.  Still, you really need to rely on the dividends alone.  The dividend yield on the S&P500 is currently around 1.8%.  What the heck am I missing here?

The other concern is that after that long period with little to no earnings growth, real earnings have rocketed up in the past 20 years.  Is that the start of a new trend or have they just gotten ahead of themselves.  I guess only time will tell.

If you type SHILLER PE DATA into google you will see a link to a spreadsheet and you can double check the numbers for yourself.

[frugal_c]

Inflation is real, I am not getting "all weird". Yes there are some items that haven't gone up by inflation and we can debate the true rate but overall things have gone up in price.  The price of food, the price of gas, the price of housing per square foot have all gone up where I live over the past 20 or 30 years.

[MustacheAndaHalf]

Didn't "earnings" get repeatedly redefined since the 1980s?  I think you're comparing different time frames with different definitions of earnings, which might make for an unpredictable comparison.

You also don't seem aware that your 1977-1997 period captures a period of extremely high inflation, which was also reflected in bond yields.  You're surprised at how little stocks beat inflation, but you don't even mention the very high rate of inflation.  I think you have more research to do.

[frugal_c]

I am very aware of the high rate of inflation in the 70's.  You are kind of cherry picking though, it doesn't change the fact that you only saw real earnings quadruple over 100 years, or double every 50 years.  I am not sure people realize that that is the growth rate.  I am not sure the changes to earnings are so material to render this analysis a waste, not over a 100 year period.  Maybe it is a 5x or 6x instead of a 4.5x, I don't know but that is still a very low growth rate.

Look I am not trying to diss stocks here.  I get it, they are the best performing asset class.  I have most of my money in stocks.  I just question what kind of a return you can expect going forward.  Ultimately your return is dividend yield + price growth, kind of.  If price only goes up 1.5% over inflation and you get 1.8% dividend that is 3.3%.   Not bad really if that is what you are budgeting for.  However what does it take to get the 6% that people talk about?  You need a lengthy period where the stock market crashes and those dividends get reinvested at much lower prices.  Or a higher starting dividend yield.  So either we go through some really rough times with the market (which is actually good) or it's going to be some modest returns.

[anisotropy]

so the earnings doubled between 1997 to 2017? 20 years?

[frugal_c]

so the earnings doubled between 1997 to 2017? 20 years?

Yes, they did.  However, consider it took 80 years before that for the earnings to double.  If we are on a new trend where they can double earnings after inflation every 20 years or so then the markets are very undervalued.  I just wonder about the preceding 80 years.  Maybe they are ahead of themselves?  I don't know.

[anisotropy]

ya I don't know, but there were two world wars between 1917 and 1957 (40 years). In comparison we've only had smaller/local armed conflicts since 1977 (40 years), which were away from OECD regions as well.

Interest rates have gone down a lot since 1977 as well. Just some observations and I don't have a quantitative answer.

[farfromfire]

so the earnings doubled between 1997 to 2017? 20 years?

Yes, they did.  However, consider it took 80 years before that for the earnings to double.  If we are on a new trend where they can double earnings after inflation every 20 years or so then the markets are very undervalued.  I just wonder about the preceding 80 years.  Maybe they are ahead of themselves?  I don't know.

1. MustacheAndaHalf is a 100% correct that redefinitions make this type of analysis questionable.

2. You're just cherry-picking to support your argument. Earnings doubled between 1947 and 1967, but you choose to look at 1917-1977 in order to make the doubling of 1997-2017 look quick.

[AlexK]

Are you sure you are doing your calculations with dividends reinvested? It makes a huge difference.

using this calculator: https://dqydj.com/sp-500-return-calculator/

From 1917 to 2017 I get

10.0% annualized return (no adjustment for inflation)
6.8% annualized return (adjusted for CPI)