Why Has the US Stock Market Soared for the Past 10 Years?

One common misconception among individual investors is that investing in the stock market of a country with high economic growth will result in high returns. While not entirely unfounded, it's not a particularly sophisticated perspective.If economic growth (GDP growth) were that important, why would the Chinese stock market, which has shown nearly three times the GDP growth of the Eurozone over the past 10 years, have lower returns than the Eurozone?

This is because the process of translating economic growth (GDP growth) into stock market returns involves several factors: 1) Top-line growth of listed companies, 2) Margins of listed companies, 3) Shareholder return policies of listed companies, and 4) Valuation of the stock market.

So, let's examine the 10-year stock market returns of major countries by breaking them down into the above factors.The core strength of the superior US market? It's not GDP growth, but rather improved corporate margins and valuation increases through active shareholder return policies.

What about Japan? While GDP growth was significantly lower than the US, and valuations fell, corporate margins improved significantly, and shareholder return policies have improved compared to the past.

The Eurozone experienced sluggish GDP growth and weak top-line growth for companies, but margin improvements and shareholder return policies offset these weaknesses, leading to a middling performance.

What's the issue with China, which had the highest GDP growth? You'll see a large red bar pointing downwards. What category does it represent? Decrease in the number of issued shares. Since it's negative, it means that the number of issued shares increased significantly, which damaged shareholder value.

And what about South Korea? A similar pattern to China. GDP growth is lower than China, and the number of issued shares also increased steadily, although not as much as China. The result of the past 10 years of stock market returns? Last place among major countries.

Over the past three years, what was the most important factor influencing stock market returns? Valuation came in first, followed by margins, and then shareholder return policies. GDP growth? Fifth place.

If we extend the period to five years, what changes? Margins take the lead, followed by shareholder return policies. GDP growth? Fourth place.

Finally, looking at the past 10 years, what do we find? Shareholder return policies take the top spot, followed by margins. GDP growth? Third place. In other words, for long-term investment, what's most crucial? Governance. This is the primary reason why no one considers the Korean stock market a viable long-term investment.

The US has seen margin improvements and strengthened shareholder return policies. Truly the kingdom of capitalism.

The Eurozone has improved its margins. Shareholder return policies were neglected but have recently shown some improvement.

China freely prints shares, and whenever an opportunity arises, everyone jumps in, leading to intensified competition and declining margins. A classic example of underdeveloped, backward nation characteristics.

South Korea? Looking solely at the stock market, there's not much difference compared to China. In other words, the current valuation isn't undervalued, but rather a fair value.

Why has the Japanese stock market been performing well recently? Margin improvements continue, and shareholder return policies have improved dramatically.

After reading this, individual investors might conclude that US stocks are the best, and they should continue investing only in them, saying 'Uncle Sam is the best!'However, it's unfortunate that individual investors are likely to find it difficult to achieve the same returns seen in the past 10 years with US stocks in the future.

This is because, in the short term, companies facing the truth about their performance will find it difficult to maintain the same shareholder return policies as before, and in the long term, the factors that supported the excellent returns of the US stock market over the past 30 years are likely to worsen.The real return of the S&P 500 index from 1989 to 2019 (30 years) was 5.5%, but in the future? It will be difficult to exceed 2%.

What's needed in this situation?

A positive mindset that accepts the situation as it is, rather than clinging to wishful thinking.

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