Figure 1 shows the historical earnings for SP500. The earnings have been growing at the respectable rate of 5.8% per year which is higher than the dividend growth rate (=companies are keeping more of their profits) but smaller than the stock price appreciation rate (=PE ratio is high and stocks are historically expensive).  Figure 1: Earnings and earnings growth for SP500. What is remarkable in the earnings growth is that it has
stayed constant regardless of level of inflation. During the era of high
inflation, the real earnings growth has been slower or even negative. Translation:
“index investing” will do poorly in the era of high inflation. |