Salaries vs. Stock Market

I shared this chart recently about the fundamental breakdown of S&P 500 returns in 2025:

The fact that the dividend yield and earnings growth are at or equal to net worth makes for a neat story.

Investors tend to focus on a variety of factors – the Fed, geopolitics, interest rates, inflation, economic growth, etc. – but corporate profits outperform stock markets over time:

Having said that…the relationship between earnings growth and stock market returns is not as clear cut as it was in 2025.

There are many times when income and the market do not agree.

Here’s a look at the S&P 500’s annual returns and the year-end change in earnings going back to 1930:

You can see the relationship between the two growth rates is absent and one over many years. In fact, there are many years when the return goes up, but the salary goes down and vice versa.

Here’s another way to visualize this:

The multi-dotted quadrant is rising, rising. That happened 47 of the last 96 years, almost half the time. Then there are 8 years when stocks and earnings both decline simultaneously.¹ This also makes sense.

So far so good.

But there have been 24 instances where earnings fell in the same year stocks finished the year higher.

And there were 17 years when the stock market was down but earnings went up.

That means that about 45% of the time stocks and earnings have gone in opposite directions in a given year since 1930. About half of all years the relationship between income growth and price growth is negative.

There are explanations for this of course.

Benefits are reported in arrears. The market is looking forward. Sometimes the expectations of investors are caught offside.

This is a good reminder that long term market power can be disrupted in the short term. Even if you know what earnings will do in a given year it doesn’t mean you can predict what will happen in the stock market.

Stocks can rise during a recession.

Stocks can fall when earnings rise.

Anything is on the table in a given year because sentiment, trends and expectations often have more to do with short-term performance than fundamentals.

Plan accordingly.

Michael and I talked about corporate earnings, microfinance, the stock market and more in this week’s Animal Spirits video:

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Further reading:
2025 Investment Courses

Now here’s what I’ve been reading lately:

Books:

¹The reason you don’t see 2008 on this chart is because earnings dropped by about 80% that year. We had to close the axis on the chart to make it easier to read. So 2008 is included in the total, you can’t see the dot. The same thing in 2009 at the height when the salary grew more than 200%.