Financial Planning Fridays #42: Higher Earnings = Higher Market

Today we wanted to talk with you about the value of the stock market over time.

In the short-term, the stock market can be unpredictable and largely based on emotion, moving very quickly up or down based upon subjectively good or bad news; bu, in the long-term the market has steadily marched higher as the earnings of the world’s top companies have grown over time.

This is a major reason why it is so important to have a disciplined long-term focused approach that is not based on emotion or guesswork. It is unlikely that today’s events, political climate, natural disaster,etc. will significantly impact the price of stocks over the long-term. In fact, please watch Financial Planning Fridays Episode #24 for a list of all of the crises in our CEO Jerry Davidse’s 22-year career that the market has not only survived but gone on to move much higher afterwards.

Let’s look at a few charts together.

This one shows the price of the S&P 500 over the past 100 years. It is now about 625 times higher than it was in 1920. The yellow line below it shows the earnings of the companies in the S&P 500—you will notice how similar the lines are over time. As companies’ earnings have increased, their share prices have also eventually increased.

Now let’s take a closer look at the earnings of the companies in the S&P 500.

They have consistently grown over time from 80 cents to about $100 in 2020 and then all the way to $172 today. In addition to the price increases, you would have also received the dividends shown in this chart over the past 100 years.

They have also steadily grown over time from 51 cents to more than $68 today. We can see here how earnings and dividends have had similar increases over time.

Many events have caused the earnings, dividends, and prices of history’s greatest companies to go down temporarily over the past 100 years. However, due to both innovation and inflation, over the long-term they have grown by exponential amounts.

And, as long as you believe in humankind’s ability to continue to grow, improve, and innovate, it is very likely that this trend will continue over the next 10, 20, and even 100 years despite all of the negative news that we will hear about during that time.

Be on the lookout for our next Financial Planning Fridays episode. Subscribe to our Youtube Channel so you never miss an episode. Or contact us directly; schedule your 15-minute call with us today.