Announcer:
4 Your Money is brought to you by NelsonCorp Wealth Management.
Brandy Auterson-Hurst:
It’s now time for 4 Your Money. We’re joined by James Nelson, financial planner at NelsonCorp Wealth Management. Welcome back, James.
James Nelson:
Thanks for having me.
Brandy Auterson-Hurst:
So the stock market has had a big run over the past few years. So what have you found out about where those returns are actually coming from?
James Nelson:
Yeah, so we’re going to start right off the bat with a chart. And this is one of those charts that looks complicated, but actually it’s pretty simple. And it shows the total return of the stock market since mid-2021 and breaks it down into what actually is driving those returns. So think of it like your tax return. It shows how much you made, but also where it’s coming from.
So there’s three main drivers here. The green line is the earnings growth, so companies actually making more money. The red line is dividends, so that’s cash paid out to shareholders. And then the blue line is multiple expansion, which means investors’ willingness to pay more for every dollar of earnings. And as you can see, the multiple expansion was driving a lot of the market, doing the heavy lifting for a long time. And stocks went higher because investors kept bidding prices higher. But now that’s fading a bit and dividends are picking up a little bit of the slack. And this is more of the old-fashioned way of driving stock market returns.
Brandy Auterson-Hurst:
Okay. So is this a good thing or a bad thing for investors?
James Nelson:
So in the short term, it might be a bit painful because when multiple expansion kind of backs up a little bit, that usually weighs on the stock market. But in the long term, it’s probably a healthier option. Returns driven from real earnings growth is a more sustainable outlook.
Brandy Auterson-Hurst:
All right, James. As always, thanks for joining us today.
James Nelson:
Thanks for having me, Brandy.
Brandy Auterson-Hurst:
If you missed any of our discussion, we’ll make it available for you on ourquadcities.com.
Past performance is no guarantee of future results. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal.
Indices mentioned are unmanaged and cannot be invested into directly.
This video includes a paid appearance.