<p>There exist at least three points that help explain this; two are generally valid, one is a COVID19 result:</p>
<ul>
<li>The distribution of individual stock returns is positively skewed. Large positive returns to a few stocks offset the modest or negative returns in most stocks. As 1muflon1 pointed out, the S&amp;P500 consists of these few stocks. Although stock returns are not the same as profits they are generally related to each other.</li>
<li>Shareholders are entitled to whatever is left after everyone else has been paid. You can lose everything, but take all income after expenses are covered.</li>
<li>Your time horizon essentially covers the period since Covid-19. Lockdowns favored many large companies (many operate in e-commerce or the online / computer business). AAPL, AMZN, MSFT, NVDA, and FB to name a few.</li>
</ul>
<p>Considering <strong>point 1</strong>, Apple and Microsoft appear in the top 5 companies in the S&amp;P in nine out of the last 10 years according to <a href="https://www.cnbc.com/2022/01/13/op-ed-these-big-names-propelled-the-sp-500-in-2021-heres-whats-ahead-for-2022.html" rel="nofollow noreferrer">CNBC</a>. There are a few good research papers like <a href="https://www.sciencedirect.com/science/article/abs/pii/S0304405X18301521" rel="nofollow noreferrer">Bessembinder</a> that show that the superior performance of the entire stock market is largely a result of the exceptional performance of a few stocks. For example, the 90 top-performing companies, slightly more than 0.3% of the companies that have listed common stock, collectively account for over half of the shareholder wealth creation since 1929.</p>
<p>Considering <strong>point 3</strong>, the same article shows that the top 5 companies in 2020 and 2021 contributed 61% and 31% of the entire S&amp;P500 return (it's not just plain return, it's also the weight of these giants that matters). Another company that performed exceptionally well was Moderna, for obvious reasons that made 2020 also a good year for Amazon.</p>
<p><strong>Point 2</strong> is a more subtle one, that is related to point 1. The screenshots below are from <a href="https://www.bloomberg.com/professional/product/bloomberg-market-concepts/" rel="nofollow noreferrer">BMC</a> (I believe, because I took these screenshots more than a decade ago and unfortunately did not write down the source). However, when I first saw this example, I thought it nicely demonstrates in a very simple form why (a few) stocks do perform very well on average and in the long run.</p>
<p><a href="https://i.sstatic.net/NoV14.jpg" rel="nofollow noreferrer"><img src="https://i.sstatic.net/NoV14.jpg" alt="enter image description here" /></a></p>
<p>The screenshots compare the cashflows of a mortgagor (Jenny) and a bank (mortgagee) with that of a shareholder and bondholder respectively. Salary (revenue) varies, while mortgage repayments (bond payments) are fixed (or at least predetermined and independent of success). Discretionary income (shareholder return / profit) is any income left after taxes &amp; costs are paid.</p>
<p>As you can see, discretionary income fluctuates wildly and is a lot more volatile than the salary (revenue) changes. Since Jenny (shareholders) are entitled to whatever is left after everyone else has been paid, any additional salary (revenue) beyond breakeven goes directly into Jenny's (shareholder's) pockets.</p>
<p>In reality, the relationship between profits and stock returns this is more complex. For example, so far TESLA was neither a particularly profitable company, nor does it sell lots of cars (compared to other car manufacturers like Toyota and co). Yet, Tesla soared significantly (although mostly before it became part of the S&amp;P500). Investors simply believe that the intensifying debate about climate change, autonomous driving, and so forth will turn Tesla into a gigantic company (commercially, in terms of valuation, it is already a giant).</p>
<p>Irrespective of this, the &quot;outperformance&quot; of the S&amp;P500 is a result of the companies in the S&amp;P500 being very big and profitable, while at the same time having profited disproportionally from COVID19.</p>
<p>In terms of where the money came from, I think Amazon is a simple intuitive example. If you cannot go to shops on high street, you buy stuff you need online. Amazon 2020 EPS increased about 82% from 2019.</p>
<p>HTH</p>

CC BY-SA 4.0
2022-04-24T22:41:36.150Z
2022-04-25T07:54:30.067Z
2022-04-25T07:54:30.067Z
Alex
<blockquote>
<p>How did the US largest companies profits have grown almost 5 times more than US GDP?</p>
</blockquote>
<p>This is because of survivorship bias. To make it into S&amp;P500 you must be one of the 500 biggest companies listed in the USA (see <a href="https://www.britannica.com/topic/SandP-500" rel="nofollow noreferrer">here</a>).</p>
<p>As a consequence only the best most efficient companies make it. There are numerous companies that over that period of time experienced loss, some went out of business etc. Moreover, if some company in S&amp;P500 stops performing well it will eventually get kicked out of the S&amp;P500.</p>
<p>Your question is essentially like asking, if average IQ is 100 why tenured professors at Harvard, MIT etc typically score standard deviation or two above the average? Well because to get tenured professorship at Ivy League university you have to be extremely smart in the first place.</p>
<p>Similarly, your company must be crème de la crème to make it to the S&amp;P500.</p>
<blockquote>
<p>Where did the money come from?</p>
</blockquote>
<p>Paying customers that payed for their goods and services. A) Money stock does not grow at the same pace as the economy does. B) Even with completely fixed money supply, 1 dollar bill can be used and reused infinitely many times. You can buy coffee using that 1 dollar bill, then the cafe pays with that bill to their employees then they use the same bill to buy groceries etc. Individual firm microeconomic performance is not really limited by quantity of money in the economy.</p>

CC BY-SA 4.0
2022-04-20T15:11:49.903Z
2022-04-20T16:09:23.870Z
2022-04-20T16:09:23.870Z
1muflon1
<p>From Q4 2019 to Q4 2022 US GDP (nominal) has grown from 21.694 trillion to 24 trillion. Which accounts to 10.5% growth in 3 years. Data from <a href="https://fred.stlouisfed.org/series/GDP" rel="nofollow noreferrer">https://fred.stlouisfed.org/series/GDP</a></p>
<p>Whereas S&amp;P500 earning have grown from 35.53 per share in Q4 2019 to 53.94 in Q4 2022, which accounts to 51.8% growth. Data from <a href="https://ycharts.com/indicators/sp_500_eps" rel="nofollow noreferrer">https://ycharts.com/indicators/sp_500_eps</a></p>
<p>How did the US largest companies profits have grown almost 5 times more than US GDP? Where did the money come from?</p>

<macroeconomics><stock-market>
Why S&P 500 earning growth is so much higher than GDP growth?
Alexander
# Why S&P 500 earning growth is so much higher than GDP growth?

(Asked by: username_0 on 2022-04-20)

From Q4 2019 to Q4 2022 US GDP (nominal) has grown from 21.694 trillion to 24 trillion. Which accounts to 10.5% growth in 3 years. Data from <https://fred.stlouisfed.org/series/GDP>

Whereas S&P500 earning have grown from 35.53 per share in Q4 2019 to 53.94 in Q4 2022, which accounts to 51.8% growth. Data from <https://ycharts.com/indicators/sp_500_eps>

How did the US largest companies profits have grown almost 5 times more than US GDP? Where did the money come from?

**Tags:** macroeconomics, stock-market

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## 2 answers

### Answer by username_1 on 2022-04-24. Score: 2

There exist at least three points that help explain this; two are generally valid, one is a COVID19 result:

* The distribution of individual stock returns is positively skewed. Large positive returns to a few stocks offset the modest or negative returns in most stocks. As 1muflon1 pointed out, the S&P500 consists of these few stocks. Although stock returns are not the same as profits they are generally related to each other.
* Shareholders are entitled to whatever is left after everyone else has been paid. You can lose everything, but take all income after expenses are covered.
* Your time horizon essentially covers the period since Covid-19. Lockdowns favored many large companies (many operate in e-commerce or the online / computer business). AAPL, AMZN, MSFT, NVDA, and FB to name a few.

Considering **point 1**, Apple and Microsoft appear in the top 5 companies in the S&P in nine out of the last 10 years according to [CNBC](https://www.cnbc.com/2022/01/13/op-ed-these-big-names-propelled-the-sp-500-in-2021-heres-whats-ahead-for-2022.html). There are a few good research papers like [Bessembinder](https://www.sciencedirect.com/science/article/abs/pii/S0304405X18301521) that show that the superior performance of the entire stock market is largely a result of the exceptional performance of a few stocks. For example, the 90 top-performing companies, slightly more than 0.3% of the companies that have listed common stock, collectively account for over half of the shareholder wealth creation since 1929.

Considering **point 3**, the same article shows that the top 5 companies in 2020 and 2021 contributed 61% and 31% of the entire S&P500 return (it's not just plain return, it's also the weight of these giants that matters). Another company that performed exceptionally well was Moderna, for obvious reasons that made 2020 also a good year for Amazon.

**Point 2** is a more subtle one, that is related to point 1. The screenshots below are from [BMC](https://www.bloomberg.com/professional/product/bloomberg-market-concepts/) (I believe, because I took these screenshots more than a decade ago and unfortunately did not write down the source). However, when I first saw this example, I thought it nicely demonstrates in a very simple form why (a few) stocks do perform very well on average and in the long run.

[![enter image description here](https://i.sstatic.net/NoV14.jpg)](https://i.sstatic.net/NoV14.jpg)

The screenshots compare the cashflows of a mortgagor (Jenny) and a bank (mortgagee) with that of a shareholder and bondholder respectively. Salary (revenue) varies, while mortgage repayments (bond payments) are fixed (or at least predetermined and independent of success). Discretionary income (shareholder return / profit) is any income left after taxes & costs are paid.

As you can see, discretionary income fluctuates wildly and is a lot more volatile than the salary (revenue) changes. Since Jenny (shareholders) are entitled to whatever is left after everyone else has been paid, any additional salary (revenue) beyond breakeven goes directly into Jenny's (shareholder's) pockets.

In reality, the relationship between profits and stock returns this is more complex. For example, so far TESLA was neither a particularly profitable company, nor does it sell lots of cars (compared to other car manufacturers like Toyota and co). Yet, Tesla soared significantly (although mostly before it became part of the S&P500). Investors simply believe that the intensifying debate about climate change, autonomous driving, and so forth will turn Tesla into a gigantic company (commercially, in terms of valuation, it is already a giant).

Irrespective of this, the "outperformance" of the S&P500 is a result of the companies in the S&P500 being very big and profitable, while at the same time having profited disproportionally from COVID19.

In terms of where the money came from, I think Amazon is a simple intuitive example. If you cannot go to shops on high street, you buy stuff you need online. Amazon 2020 EPS increased about 82% from 2019.

HTH


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### Answer by username_2 on 2022-04-20. Score: 1

> How did the US largest companies profits have grown almost 5 times more than US GDP?

This is because of survivorship bias. To make it into S&P500 you must be one of the 500 biggest companies listed in the USA (see [here](https://www.britannica.com/topic/SandP-500)).

As a consequence only the best most efficient companies make it. There are numerous companies that over that period of time experienced loss, some went out of business etc. Moreover, if some company in S&P500 stops performing well it will eventually get kicked out of the S&P500.

Your question is essentially like asking, if average IQ is 100 why tenured professors at Harvard, MIT etc typically score standard deviation or two above the average? Well because to get tenured professorship at Ivy League university you have to be extremely smart in the first place.

Similarly, your company must be crème de la crème to make it to the S&P500.

> Where did the money come from?

Paying customers that payed for their goods and services. A) Money stock does not grow at the same pace as the economy does. B) Even with completely fixed money supply, 1 dollar bill can be used and reused infinitely many times. You can buy coffee using that 1 dollar bill, then the cafe pays with that bill to their employees then they use the same bill to buy groceries etc. Individual firm microeconomic performance is not really limited by quantity of money in the economy.


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