Deconstructing S&P Returns

February 10, 2022

Since 1880, the market has returned 9.4% annualized. Since the start of 1982, the S&P 500 has returned 12.1% annualized. This seems like an extraordinary period of equity growth until you decompose the factors of performance.
Dividend yield dropped from 5.4% in 1982 to 1.3% in September 2021. Earnings also grew at 6.3% over that period, which was better than the 4.4% since 1880. These factors accounted for 8.9% on an annual basis since 1982, far closer to the historical return averages.
Where did the rest come from? Financial asset inflation like we’ve rarely seen before, as the P/E expanded from 8x in 1982 to over 25x in September 2021.
Absent this financial asset inflation, investors forfeited over 2/3rds of their gains.

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