Question

The average returns for large-cap stocks have been around 9 or 10 percent. This is in a period where GDP growth has averaged less than 3 percent - actually 2.31 percent over the past 20 years 1999-2018.. How is this possible that stocks can produce a multiple of GDP growth? If the “new normal” for GDP growth is 2% (or less) what would be your long-term average of future stocks returns? Why??

Answer 1

The CAGR Of various Large capital stocks have been 9-10 Percent when GDP growth was close to 3 Percent because The large capital stocks acquire a major chunk of that GDP growth and their company profit growth can be in the 20 percent bracket. When GDP is in lower single digits, All the growth are attributed to leaders of the particular sector as small business close down and they continue on regaining more market share.

If the GDP growth will be 2 Percent, I still expect these companies to grow at almost 5 percent in delivering returns as they will continue to be largest contributors in shrinking markets. One of the other factor is most companies have operations outside the boundaries of one country so they grow by other economy's GDP growth.