SP500 total return decomposition

The total return is composed of price appreciation and dividends:

Appreciation had double the impact of dividend yield in total return since the 50s. Before that, dividend yield was the main driver of total return. The dividend yield required by market participants has reduced in the 50s as they realized that equity is a better inflation hedge than bonds.

The price appreciation is composed of multiple expansion and earning growth:

Earning growth gives the baseline of the price appreciation over periods of 30 years, whereas earning multiples are much more volatile over periods lower than 10 years.

The SP500 appreciation is mainly carried by earnings growth. This was slower from 1870 to 1940 and it is higher the 40s. In the last, 40 years the multiples have reached elevated level which was only ever reached before the great depression.

The earnings is smoothed over a 10Y period to avoid a dramatic shock down in earnings growth 2009 an shock up on the multiple at the same time.

Conclusions:

Earnings growth are what matters in the long run. Multiple expansion can play a role in a 10y to 20y period.

It should be noted that earnings grew in an age of inflation.