The returns of the 2009-2020 bull market were nothing short of extraordinary. From the 2009 low in the S&P 500 to the 2020 high, stocks gained a massive 488%, or nearly 18% on an annualized basis. This compares to an average nominal price return for US stocks of about 5.5% annualized going all the way back to 1896, or 6.7% in the post-war period. So, the recent bull market produced average annual returns more than 3x that of normal. Even if we measure the S&P 500’s full cycle performance from the low in 2009 through the low in 2020, that still gives us an annualized return of 14.5%, or nearly three times the annual average return through history.

Going forward, can this type of high return environment be replicated? To answer that question it helps to understand the sources of equity appreciation from the previous cycle and ask whether those things are likely to be repeated during this cycle.

Let’s start with decomposing earnings per share into its piece parts.

  • From the 2009 low in stocks through the recent high earnings per share rose about 265% in total (12.5% annualized, from about $43/share to about $157/share).
  • Contributing to this rise was rising sales, which increased about 33% in total, or 2.6% annualized.
  • The tax cuts enacted in 2017 also added significantly to aggregate earnings, boosting EPS by 19.3%.
  • Share buybacks were on a tear over the last five years, adding 1.3% to EPS in each of those years through the reduction in the denominator. But share issuance was rampant at the beginning of the cycle. In total, share buybacks added 4.5% to aggregate EPS over the last bull market.
  • The final leg in EPS growth is what we will call ‘other margin expansion’. The aggregate profit margin for the S&P 500 expanded from 7.7% in 2009 to 11.8% in 2020. Some of this margin expansion was due to tax cuts, but most of it was due to lower interest rates (10-year rates fell from about 3.3% to 0.3% more recently), and wages falling relative to aggregate output (wages as a percent of GDP fell from 45%, to an all-time low of 42% in 2011, and have recently risen back to 43.5%).

As previously stated, the S&P 500 rose by 488% over the previous cycle. Roughly 265% of this was due to higher earnings, and the rest was due to multiple expansion. The P/E ratio rose from about 10 in early 2009 to about 22 at the beginning of 2020, which is a 220% rise. So, 60% of the appreciation in the S&P 500 came from earnings growth and the other 40% came from multiple expansion.