Monday, March 16, 2009

GDP vs. S&P by Decade

As a follow up to last week's breakdown of the S&P 500 vs. GDP, here is a breakdown of performance by decade.

Comparing this chart to the real historical earnings and dividend yields below (i.e. yields less CPI), we see that outperformance of equities in the 1950's, 1980's and 1990's is correlated to the decrease in required earnings and dividend yield (i.e. P/E and P/D expansions).

For equities to outperform going forward we need either earnings to grow faster than GDP or the required yield to drop (i.e. multiplier to once again expand). Not an easy thing given the earnings pressure due from the economic turmoil (and increased cost of financing) or the historically low levels of yield the equity market already "requires".

Source: Irrational Exuberance