How does the stock market keep going up?

1the premise

Damodaran's long record of S&P 500 returns, dividends included, shows the worst year was 1931, at a loss of about 44 percent.

2it falls too

It fell again in 2008, about thirty-seven percent, and in 2022 about eighteen percent. The climb is real, but it is jagged.

3the long run

From 1928 to 2025 the S&P 500, with dividends reinvested, grew at a geometric average of about 10 percent a year in nominal terms, meaning before adjusting for inflation. Individual years ranged from a loss of about 44 percent to a gain of about 53 percent.

The S&P 500 averaged about 10 percent a year from 1928 to 2025, before inflation, with dividends.

4three parts

Averaged over the decades of the twentieth century, John Bogle found, the starting dividend yield was 5.0 percent and annual earnings growth was 4.8 percent, an investment return of 9.8 percent. The price-to-earnings ratio rose from 12.5 to 13.3 on average, adding a speculative return of 0.6 percent, for a total of 10.4 percent a year.

Dividends and earnings growth supplied nearly all of the 20th-century return.

5the engine

The engine is a loop: firms earn profits, reinvest, grow, and earn more. Over the long run, Bogle found, enterprise drives returns, not mood.

6valuation swings

In the 1970s corporate earnings grew 9.9 percent a year and dividends added about 3.5 percent, yet the price-to-earnings ratio fell about 60 percent, from 16 to seven, costing stocks 7.5 percent a year. Changing valuations, not profits, caused that drag: investors paid less per dollar of earnings, a shift Bogle calls speculative return, often linked to inflation, rising rates and fear.

In the 1970s earnings grew 9.9 percent a year but P/E fell from 16 to 7.

7the whole idea

So it doesn't keep going up; it keeps being pushed up by dividends and earnings growth, with dips whenever investors reprice, often out of fear or as rates and inflation jump.