Is the very long-term growth of the stock market bound by aggregate net income?
I am a believer in that theory. My opinion is that over the long term, we can expect 25% of income to reflect the payment on one's mortgage, and if you drew a line over time reflecting the mortgage this represents plus the downpayment, you'd be very close to a median home price. The bubble that occurred was real, but not as dramatic as Schiller's chart implies. $1000 will support a $124K 30yr mortgage, but $209K at 4%. This is with no hype, and exact same supply/demand pressures.  The market cap of all US companies adds to about $18T. The total wealth in the US, about $60T. Of course US stocks aren't just held by US citizens, it's a big world.  Let me suggest two things - the world is poor in comparison to much of the US. A $100,000 net worth puts you in the top 8% in the world. The implication of this is that as the poorer 90% work their way up from poverty, money will seek investments, and there's room for growth.  Even if you looked at a closed system, the US only, the limit, absent bubbles, would be one that would have to put a cap on productivity. In today's dollars we produce more than we did years ago, and less than we will in the future. We invent new things faster than the old ones are obsoleted. So any prognostication that our $18T market can grow to say, $30T, does not need to discuss P/Es or bubbles, but rather the creation of new products and businesses that will increase the total market.  To summarize -  Population growth (not really discussed), Productivity, and long term reduced Poverty will all keep that boundary to be a growing number.  That said, this question may be economic, and not PF, in which case my analysis is bound for the Off-Topic barrel. Fascinating question.
Stock prices reflect future expectations of large groups of people, and may not be directly linked to traditional valuations for a number of reasons (not definitive). For example, a service like Twitter is so popular that even though it has no significant revenue and loses money, people are simply betting that it is deeply embedded enough that it will eventually find some way to make money. You can also see a number of cases of IPOs of various types of companies that do not even have a revenue model at all. Also, if there is rapid sales growth in A but B sales are flat, no one is likely to expect future profit growth in B such that the valuation will remain steady. If sales in A are accelerating, there may be anticipation that future profits will be high. Sometimes there are also other reasons, such as if A owns valuable proprietary assets, that will hold the values up. However, more information about these companies' financials is really needed in order to understand why this would be the case. "A 'indexed guaranteed income certificate' (Market Growth GIC) fits the criteria defined in the OP. The ""guaranteed"" part of the name means that, if the market falls, your capital is guaranteed (they cover the loss and return all your capital to you); and the ""index linked"" or ""market growth"" means that instead of the ROI being fixed/determined when you buy the GIC, the ROI depends on (is linked to) the market growth, e.g. an index (so you get a fraction of profit, which you share with the fund manager). The upside is that you can't 'lose' (lose capital). The fund manager doesn't just share the losses with you, they take/cover all the losses. The downside is that you only make a fraction of whatever profit you might make by investing directly in the market (e.g. in an index fund). Another caveat is that you buy a GIC over some fixed term, e.g. you have to give them you money for a year or more, two years." "In general, when dealing with quantities like net income that are not restricted to being positive, ""percentage change"" is a problematic measure. Even with small positive values it can be difficult to interpret. For example, compare these two companies: Company A:  Company B:  At a glance, I think most people would come away with the impression that both companies did badly in Y2, but A made a much stronger recovery. The difference between 99.7 and 99.9 looks unimportant compared to the difference between 100,000 and 40,000. But if we translate those to dollars: Company A: Y1 $100m, Y2 $0.1m, Y3 $100.1m Company B: Y1 $100m, Y2 $0.3m, Y3 $120.3m Company B has grown by a net of 20% over two years; Company A by only 1%. If you're lucky enough to know that income will always be positive after Y1 and won't drop too close to zero, then this doesn't matter very much and you can just look at year-on-year growth, leaving Y1 as undefined. If you don't have that guarantee, then you may do better to look for a different and more stable metric,  the other answers are correct: Y1 growth should be left blank. If you don't have that guarantee, then it might be time to look for a more robust measure, e.g. change in net income as a percentage of turnover or of company value." GDP growth is one of several components of nominal equity returns; the (probably not comprehensive) list includes:  Real GDP/earnings growth  Inflation  Dividend payouts and share buybacks  Multiple expansion (the market willing to pay more per dollar of earnings)  Changes in interest rate expectations  As other comments mention you could also see larger companies tending to deliver higher returns as for any number of reasons related to M&amp;A, expansion into foreign markets, etc. Monetary base and growth are no longer correlated, at least that's what we know from QE in the US. Source, some research I did as an undergrad and papers I can't cite from my phone. But in all seriousness, I doubt there are many mainstream economists that would cite the monetary base as a key driver of growth. I don’t know specifics of the situation but one possibility would be that Buffett may have billions in various assets etc companies he owns, stocks bonds, but if he doesn’t sell any of those stocks or cash in any of those bonds, then on paper he didn’t make any money that year because he’s letting the assets appreciate. I would say net income is the amount of income you claimed that year, so if you had sold some stock, the amount of money you sold them for would be your income. As opposed to net worth being “if they wanted to” if Buffett sold all of his stocks and assets, he would be able to get billions for it. So while he technically is worth billions, on his tax returns he doesn’t claim much income. See the Moneychimp site. From 1934 to 2006, the S&P returned an 'average' 12.81%. But the CAGR was 11.26%.  I wrote an article Average Return vs Compound Annual Growth to address this issue.  Interesting that over time only a few funds have managed to get anywhere near this return, but the low cost indexer can get the long term CAGR minus .05% or so, if they wish. "The U.S. economy has grown at just under 3% a year after inflation over the past 50 years. (Some of this occurred to ""private"" companies that are not listed on the stock market, or before they were listed.) The stock market returns averaged 7.14% a year, ""gross,"" but when you subtract the 4.67% inflation, the ""net"" number is 2.47% a year. That gain corresponds closely to the ""just under 3% a year"" GDP growth during that time." "1. That's a really complicated answer. In short, I think we need to make accounting rules much simpler (I say this as an accountant) in combination with financial education in K-12 school. Most adults in this country can't tell you which is a better investment: something that returns 5% monthly or something that returns 10% annually. They don't know that accounting income and cash flow are different things and what they mean. Accounting rules are sometimes ridiculous. Look at the balance sheet of even a moderate size company. What's in ""Other Comprehensive Income"" and why is that different than net income? Why is it that American Airlines, one of the largest airlines in the world doesn't have a single airplane on their balance sheet?  2. That might be a step in the right direction, but I'm just not sure how effective something like that would be. More comprehensive might be better, but then there's going to be less people that want to take the time." [Here's a link to the actual paper](https://eml.berkeley.edu/~saez/Piketty-Saez-ZucmanNBER16.pdf)  Something I found interesting from it:  &gt;Third, we find that the upsurge of top incomes has mostly been a capital-driven phenomenon since the late 1990s. There is a widespread view that rising income inequality mostly owes to booming wages at the top end, i.e., a rise of the “working rich.” Our results confirm that this view is correct from the 1970s to the 1990s. But in contrast to earlier decades, the increase in income concentration over the last fifteen years owes to a boom in the income from equity and bonds at the top. The working rich are either turning into or being replaced by rentiers. Top earners became younger in the 1980s and 1990s but have been growing older since then. Great question. Surprisingly, stock returns and GDP growth are mostly unrelated. In fact, they are slightly inversely correlated when you look across countries. Consider a firm that earns $100 on average per year with zero growth. If investors apply a 10% discount rate to this firm, the company will have a market value of $100/10% = $1,000. If it continues to earn $100 per year, it will produce 10% returns despite zero growth in earnings. You can see that realized returns are largely a function of the return investors demand for putting their money in risky assets.  I say mostly unrelated because an increase in GDP growth may increase our firms earnings (though the relationship to earnings per share is muddied by new share issuances, buybacks, M&amp;A, etc.). But you can see from the above example that returns can vastly exceed growth in perpetuity. You seem to think that the term “held”is used correctly. There lies your logical fallacy.   I made no such assumption. In my question I test both the use of the term “US economy” AND the term “held”.   It is obvious you can’t “hold” income but if you want to get down to technicalities, both asset and income/expenses are types of accounts while the notion of “trust” is a legal construct to limit the rights of external creditors. "If you look at the biotech breakdown, you'll find a lot of NAs when it comes to P/E since there are many young biotech companies that have yet to make a profit.  Thus, there may be something to be said for how is the entire industry stat computed. Biotechnology can include pharmaceutical companies that can have big profits due to patents on drugs. As an example, look at Shire PLC which has a P/E of 1243 which is pretty high with a Market Capitalization of over a billion dollars, so this isn't a small company.  I wonder what dot-com companies would have looked like in 1998/1999 that could well be similar as some industries will have bubbles you do realize, right? The reason for pointing out the Market Capitalization is that this a way to measure the size of a company, as this is merely the sum of all the stock of the company.  There could be small companies that have low market capitalizations that could have high P/Es as they are relatively young and could be believed to have enough hype that there is a great deal of confidence in the stock.  For example, Amazon.com was public for years before turning a profit.  In being without profits, there is no P/E and thus it is worth understanding the limitations of a P/E as the computation just takes the previous year's earnings for a company divided by the current stock price.  If the expected growth rate is high enough this can be a way to justify a high P/E for a stock.  The question you asked about an industry having this is the derivation from a set of stocks.  If most of the stocks are high enough, then whatever mean or median one wants to use as the ""industry average"" will come from that." Assuming S&amp;P value as % of GDP doesn't change, to get S&amp;P return you add (Nominal GDP % growth + Dividend Yield) -&gt; S&amp;P return.  Historically the S&amp;P has grown faster as corporations of won market share and therefore grown to a larger portion of GDP.  While this can continue (or possibly reverse), and can happen globally as well, you are correct in pointing out that it cannot continue ad infinitum. A lot of these answers are strong, but at the end of the day this question really boils down to: Do you want to own things? Duh, yes. It means you have: By this logic, you would expect aggregate stock prices to increase indefinitely.   Whether the price you pay for that ownership claim is worth it at any given point in time is a completely different question entirely.