GDP vs. Profits Paradox: Strong Returns in Slow Growth Environments

I saw the Reddit post Is investing based on the speculation of infinite growth? going viral

While I have been in the stock market for two years, and I have seen my portfolio increase I now have a concern as a long term investor. Over the past several decades we have seen the S&P provide an average annual return of around 10% greatly outpacing 3% inflation. I am concerned this can not be sustained over the long term due to the fact the earth has limited resources, and that investing may be based on the speculation of infinite growth which may not be possible. Does anybody else feel this same concern or can prove me wrong.

When you invest in the stock market, you’re investing in companies and the ability of said companies to deliver ‘shareholder value’. You’re not investing in GDP, inflation, productivity, population growth, fertility, geopolitical stability, etc. This may be obvious, but the distinction is important, as discussed in Why Declining Population Growth and Sluggish GDP Growth are Not a Concern for Investors. The aforementioned factors, in the long run, may be important for how well companies perform, but in the short term, micro/company-specific factors tend to dominate over macro-sized societal factors.

This may seem myopic to only care about profits and not the other things going on in the world, but I don’t write the rules of Wall St.

GDP does not mean stock market gains. You can have strong shareholder returns even if the economy is not growing at all. To give an example, if a $1 billion company generates $100 million in profit annually, this is $100 million that must go to shareholders regardless of GDP, productivity, population growth, etc. I call this the profits vs. GDP paradox, of how it’s possible for multinationals to generate double-digit returns for investors even if GDP is growing at single digits or not even growing at all. This is the situation right now in the US…major companies are generating huge profits annually even if real GDP, productivity, and population growth is sluggish.

This is why so many people were confused as to why the stock market did so well in 2020-2021 despite Covid, unrest (such as the 2020 BLM riots), political division, and everything else going wrong with America at the time (and still now), because such division does not hurt the ability of large companies to generate huge profits.

On a related note, from the perspective of the investor or capitalist, the goal is not to grow ‘total wealth’, as in GDP, but to concentrate wealth within one’s chosen investments. Having ‘more growth’ does no good for investors is that wealth is diluted or spread out. Investors in Bay Area real estate have done so well over the past few decades because of so much wealth being concentrated in this small region. Same for investors in Ireland real estate even if in terms of GDP Ireland is small. Facebook and Google were able to funnel the online advertising industry to their platforms, which enriched investors of those companies.

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