By Victor Haghani and James White1
ESTIMATED READING TIME: 4 min.
US Exceptionalism
Over the past 125 years, the US has been an exceptional place to do business, combining solid productivity growth and population growth2 with world-leading innovation and powerful geopolitical advantages. The US emerged from both world wars physically unscathed3 and economically strengthened, allowing it to lead the global economy while much of the world rebuilt. Its development of the atom bomb and projection of both hard and soft power cemented its influence on the world stage. Domestically, the US has fostered a uniquely business-friendly legal and regulatory environment, encouraging entrepreneurship, protecting property rights, and supporting deep capital markets. The US possesses tremendous natural resources, and intellectual ones too, with roughly half of all Nobel prizes awarded to researchers living in the US. This combination of economic dynamism, technological leadership, and institutional strength form the fundamental backdrop to the prevailing belief in US exceptionalism.
US Stock Market Exceptionalism
The US stock market has delivered tremendous returns to investors: an average annual return of 8.5% above inflation over the past 125 years,4 the highest among all major global stock markets. It is not surprising that nine out of ten of the world’s largest companies by market capitalization are US companies.
US Stock Market Earnings Un-exceptionalism?
Given the facts laid out above, to what extent was the exceptional US stock market performance due to US companies riding the strong wave of 3.2% per annum US real GDP growth to generate exceptional earnings growth? By “riding the wave,” we mean obtaining corporate earnings growth in line with GDP without requiring any reinvestment.
According to data provided by Professor Robert Shiller, real US earnings growth over the past 125 years was 2.0% per annum. That may seem to support the notion that US companies enjoyed some pleasant surfing but didn’t catch the full wave of the 3.2% GDP growth – but in fact, it’s telling us there wasn’t any good surfing at all.
We need to consider that US companies, on average, retained 43% of their earnings to invest in plant and equipment or to buy back their stock, both of which are expected to generate earnings growth. Indeed, using either the stock market earnings yield or actual stock market real returns, the 43% of earnings that companies didn’t pay out as dividends should have generated about 3% real earnings growth just by itself, in addition to any GDP surfing. So, had companies caught the full wave of US exceptionalism, they should have seen earnings growth of over 6% – a pretty far cry from the actual 2% they delivered.5 It looks more like they never made it off the beach!
Another way of seeing the decidedly unexceptional earnings performance is to look at actual market returns compared to expected returns. If companies had paid out all their earnings as dividends, and if they weren’t getting any earnings boost from the exceptional US environment, then we’d expect their earnings to grow in line with inflation, and no more than that. So if you invested in the US stock market in 1900, and you believed that corporate earnings would grow with inflation, then you’d have expected to earn a long-term real return equal to the earnings yield of the US stock market in 1900, which was about 8%. And that’s pretty much what you got – 8.5% to be precise. That extra 0.5% is explained by the nearly doubling of the price-earnings market multiple from 1900 to today.
The conclusion – admittedly from just this one data point – is that while the US has indeed enjoyed a tremendously exceptional economic environment over the past 125 years, this has not translated into earnings growth that US companies could freely tap into. In the table below, we show that the story looks pretty much the same over the past 100, 75 and 50 years too.
| Real Earnings Growth | Avg. Earnings Yield | Avg. Payout Ratio | Earnings Growth, Adjusted for Inflation & Retained Earnings | |
| from 1900 | 1.96 | 6.9% | 57% | -1.0% |
| 1925 | 2.48% | 6.3% | 55% | -0.3% |
| 1950 | 2.58% | 5.8% | 50% | -0.3% |
| 1975 | 2.93% | 5.6% | 48% | 0.0% |
Non-US Corporate Earnings Growth
Unfortunately, we don’t have good data for non-US markets going back more than 50 years, but the picture for non-US real, payout-adjusted earnings growth over the past 50 years is less than 1% worse than that of the US. If you incorporated that experience into your view of prospective real returns, you’d want to reduce your estimate based on the earnings yield of non-US stocks by about 1%, a relatively minor adjustment.
Connecting the Dots
The US has been extraordinarily exceptional in so many important dimensions but corporate earnings growth has not been one of them. The past 125 years of US stock market and corporate earnings experience is supportive of the idea that if companies pay out all their earnings as dividends, they’d be able to keep earnings growing with inflation, but no more than that, even with great economic tailwinds. If this holds in the future too, it implies that the market’s earnings yield serves as a simple and useful estimate of the long-term real return of the stock market.6
US stock returns from 1900-2025 have been truly exceptional, but are almost entirely explained by their high starting earnings yield in 1900. By contrast, today’s US stock market earnings yield of 3.5% predicts low long-term real returns, and low relative returns compared to safer assets.7
- This is not an offer or solicitation to invest, nor are we tax experts and nothing herein should be construed as tax advice. Past returns are not indicative of future performance.
- Roughly 2% productivity growth + 1.2% population growth => 3.2% real GDP growth.
- With the exception of the bombing of Pearl Harbor.
- This is the average arithmetic annual real return. The geometric, compound real annual return was lower, at about 6.8%.
- It may appear that S&P500 earnings as a share of US GDP must have been declining by 1.2% per annum given the difference between 2% real earnings growth and 3.2% real GDP growth. However, the earnings growth figure we are focused on, and which is relevant to stock market investors (and which Shiller provides), is earnings growth per share of S&P500, and not total aggregate S&P500 earnings. US companies have been net issuers of equity over time, which has allowed total earnings as a fraction of GDP to remain relatively constant over the past 125 years, even as earnings per share of the S&P500 trailed GDP growth by 1.2% per annum.
- For more information, see our note on P-CAPE and the most important number in investing.
- For more, see our latest Capital Market Assumptions.