Unexceptional US Stock Market Earnings?

A recent analysis suggests that US economic and geopolitical exceptionalism has not historically translated into superior corporate earnings growth. Instead, US stock market returns over the past 125 years were primarily driven by high starting earnings yields, with real corporate earnings growth significantly lagging GDP expansion. Consequently, the current lower earnings yield implies that future long-term real returns for US equities are likely to be modest and potentially lower than those of safer assets.

Analysis

A historical analysis of the US stock market over the past 125 years posits that returns have been primarily a function of high starting earnings yields, not a direct translation of the nation's economic or geopolitical exceptionalism. The research indicates a significant divergence between GDP growth and corporate performance, with real earnings growth for US companies lagging far behind economic expansion, even when accounting for reinvested earnings. This challenges the conventional wisdom that investing in US equities is synonymous with capturing the benefits of superior GDP growth. Applying this historical lens to the present, the current environment of lower earnings yields suggests that future long-term real returns for the US stock market are likely to be modest. The analysis carries a pessimistic tone, further implying that these subdued equity returns may not compensate for risk and could potentially underperform safer asset classes, creating a challenging outlook for traditional asset allocation models.

Key Decisions for Investors

• Investors should critically reassess their long-term real return expectations for US equities, as current low earnings yields suggest future performance may be significantly more modest than historical averages.
• Given the projection that safer assets may offer competitive or superior returns, it is prudent to evaluate strategic allocations to fixed income or other asset classes that may provide a better risk-adjusted outlook.
• Focus on the aggregate market earnings yield as a key valuation metric, rather than relying on US GDP growth as a proxy for future corporate earnings performance.
• Consider strategies that are less dependent on broad market appreciation, as the primary driver of past returns—high starting yields—is no longer present.