I looked at the MSFT, APPL and GOOGL earnings and given their Index weighting, how anyone with a basic math skills assume the earnings are going to mean revert to $140.
There is no point in using 10 year CAPE for Apple, MSFT, GOOGL, AMZN and FB. Together they account to what??..
I hope everyone takes time to read the above slowly few times to let it sink why CAPE is useless.
Together? Theyâre an anecdote.
You canât extrapolate from four or five companies to the rest of the market, even if theyâre big.
Telling a great story about a few very successful companies doesnât tell a story about the whole.
As you note, there is no point in using 10 year CAPE for Apple, MSFT, GOOGL, AMZN and FB, but conflating the two is in effect the core of your argument.
Are they growing faster than the economy? Sure. Theyâre doing great!
How? By taking revenue and profits from some other firms, which are probably also in the index.
Tell a different story about the revenue growth at Verizon and Cisco and Chevron and McDonalds, slow growers all,
and similarly extrapolate it to the whole market, and youâll get the opposite conclusionâbut it will be equally wrong.
If you want to talk about the sum of the profits of all public firms and where theyâre headed, you have to look at the whole set. And think about the limits on the whole set.
To believe that the aggregate sales of all public companies can exceed the growth rate of the economy,
or that profits can grow faster than sales without limit, is (sorry) just plain innumeracy.
You can slice up a pie as many ways as you like, but the pieces canât be bigger than the whole.
Hereâs the key point:
For the set of all companies over time, sales canât grow faster than the economy, and profits canât grow faster than sales.
I hope everyone takes time to read the above slowly few times to let it sink in.
So, over time, aggregate profit growth will very very closely resemble aggregate economic growth.
Sometimes tax rates are a bit lower for a while or the economy a bit stronger and corporate profits will be a bigger piece of the economic pie for a while, and sometimes the reverse.
But we know that profits will never exceed sales, even if you wait a thousand years.
SoâŚwhatâs the hard cap on the real profit growth of the broad index over time? The real growth rate of the economy.
Itâs not a hard figure to find. Nor a hard figure to extrapolate, give or take a percent.
It sure ainât 10% a year.
Aggregate profits for the S&P 500 have risen inflation + 2.23%/year in the last fifty years.
(the rest of the real total return came from dividends and multiple expansion)
Note the remarkable similarity to the typical figures in this image
https://s3-us-west-2.amazonaws.com/courses-images/wp-contentâŚ
An interesting side not, not really on point:
Take the set of all public companies on a given day. Watch what happens to them thereafter. What has been their historical profit growth rate?
About 2% less than GDP growth in the same stretch, typically, in the 20th century.
Thatâs because theyâre displaced by new companies on average at about that rateâtheir share of total sales falls.
Any fixed set of companies typically grows, in aggregate, quite a bit more slowly than the economy theyâre embedded in.
The new firms that are meaningfully large frequently go public, so you have to buy them to even keep up with GDP.
Jim
