By Kevin Wood, CFP™, June 2025

It’s the Earnings, Not the Easy Money

In the 1992 US presidential race, James Carville famously hammered a hand-written note above the campaign fax machine: “It’s the economy, stupid.” The slogan kept the Clinton team from vanishing down policy-wonk rabbit holes. This month’s declinist headlines about “a new era of lower returns” called that sign to mind—except the word I’d underline today isn’t economy but earnings.

A perennial prophecy

Barron’s recently convened three market sages who agreed—helpfully—that future equity returns will disappoint. If that sounds familiar, it should. I’ve heard versions of this gloomy chorus every year of my 15-year career and, by all accounts, for decades before that. The usual culprit? Central-bank policy. Apparently, our portfolios have floated sky-high only because the Federal Reserve (and by inference the Bank of England) kept the monetary punch-bowl brimming.

Yet when you look at the numbers rather than the narrative, the story is very different.

What really powered returns

Take the S&P 500. At the dot-com peak on 24 March 2000 the index closed at 1,527.46 points (finance.yahoo.com). Last week it finished just under 5,936 points (spglobal.com)—that’s a near four-fold price rise. Re-invest the dividends and £100,000 left alone then would be worth roughly £465,000* today.

Why? Because companies earned more money—vastly more.

• Earnings per share (S&P 500)

– 1999: $51.68

– 2024 (est.): $243.64

– Change: ↑ ~4.7×

• Dividends per share

– 1999: $16.69

– 2024 (est.): $75.83

– Change: ↑ ~4.5×

Sources: NYU Stern (pages.stern.nyu.edu), S&P Global/FactSet estimates (profitabilityissues.com), Multpl (multpl.com)

Meanwhile the US consumer-price index—better known as inflation—has not even doubled, climbing from about 166 in 1999 to 321 today (bls.gov, bls.gov). In other words, dividends have grown more than twice as fast as the cost of living.

Productivity, not pixie-dust

Behind those fatter corporate profits sits something refreshingly un-mysterious: workers producing more. Real US GDP per head has surged from roughly $49,000 at the end of 1999 to almost $69,000 now—about a 40 per cent leap (fred.stlouisfed.org, fred.stlouisfed.org). Technology, global trade, and countless small innovations did the heavy lifting, not central-bank sorcery.

The UK story is less dramatic but directionally similar. Despite Brexit, Covid and the cost-of-living crunch, British listed companies have also grown earnings, and FTSE 100 dividends today are at record highs in sterling terms. Clients who have owned a globally diversified share portfolio have participated in that growth regardless of whether the Old Lady of Threadneedle Street was cutting or hiking Bank Rate.

Why this matters for retirees

For anyone drawing an income from their portfolio, this distinction—earnings versus easy money—is critical:

• Income resilience. Dividends ultimately come from profits, not interest-rate policy. Robust earnings growth helps cash flows keep up with, and often beat, inflation.

• Valuation discipline. Markets will always swing between “this-time-is-different” optimism and “winter-is-coming” pessimism. Focusing on long-run earnings power keeps us from selling great companies at bargain prices when headlines turn bleak.

• Strategic withdrawals. At Oak Four we design spending strategies that marry rising dividend streams with planned capital sales, so you can enjoy today without imperilling tomorrow. That plan assumes recessions, rate cycles and bear markets will come and go—because they always do.

The next scary headline

Will returns over the next 25 years match the last 25? Probably not point for point. The precise number doesn’t matter. What matters is that human ingenuity tends to expand profits faster than populations and prices. Unless you think that progress is about to stop—permanently—earnings growth will keep compounding in your favour.

So next time you read that markets can’t possibly rise because rates are higher, gently remind yourself (and any nervous friends): it’s the earnings, stupid. Then get back to living the retirement you’ve planned for.

*Total-return figure uses index-level price change plus reported dividends; currency conversion assumes 1 USD = 0.79 GBP. Past performance is no guarantee of future results and this newsletter is not personal advice. If in doubt, please speak to your adviser.

Why all the Yankee numbers?
Although you and I spend in sterling, a large slice of every globally diversified portfolio—including most UK pension funds—lives and breathes in the United States. America still accounts for roughly 60 % of total world-stock-market value and an even bigger share of the world’s listed company profits. In other words, if you own an index fund, a multi-asset fund, or a typical workplace pension, you already have more invested on Wall Street than on Threadneedle Street.

That makes the S&P 500 the most useful long-term laboratory for studying how earnings growth, dividends and share prices interact—less parochial, more planetary. The same forces drive companies everywhere (including the FTSE 100); the US data are just richer and more transparent. So while the accent may be American, the lesson is universal: profits, not policymakers, power your returns.