This piece uses a very useful framework created by John Bogle for his classic book published 30-years ago (titled “Bogle on Mutual Funds”). In that book, Bogle shows that you can decompose the investment returns generated by the stockmarket into 3 segments): dividends, earnings growth and growth in P/E. Nir Kaissar uses this framework to make an important point regarding the post-Lehman bull market in the United States: “So what do the numbers reveal about the last decade? Of the S&P 500’s 13.3% annual return since 2010, 2.3% came from dividends, 10.2% from earnings growth and 0.8% from the change in the market’s valuation, as measured by the 12-month trailing price-to-earnings ratio. In other words, the vast majority of the gains can be attributed to a spike in earnings rather than investors’ willingness to pay more for stocks. In fact, the decade’s earnings growth was the highest on record.
That’s a problem for those who credit the Fed for the market’s stellar decade because cheap money doesn’t appear to have pushed investors to splurge for stocks. That jibes with the recent experience of much of the developed world, where a flood of monetary stimulus in Europe and Japan over the last decade failed to expand their stock market valuations. It’s also consistent with the longer-term record in the U.S., which shows no correlation between P/E ratios and the level of interest rates since 1871, as measured by 10-year Treasury yields (-0.12), counted monthly…
Nor is there any indication that monetary policy is behind the record jump in earnings. Here again, earnings growth has been muted in Europe and Japan in recent years despite aggressive stimulus by central banks.”
There is also this notion out there that American EPS growth is driven by buybacks, not by underlying PAT growth. Nir Kaissar says: “Buybacks don’t account for the growth, either. Yes, all else equal, buybacks reduce the number of outstanding shares and thereby lift earnings per share, the number commonly used to gauge earnings growth and P/E ratios. But total earnings have grown by 9.4% a year since 2010, just shy of earnings-per-share growth of 10.2%, so buybacks don’t appear to have contributed much. It’s not even clear that the recent rate of buybacks is unusually high.”
We have a vested interest in highlighting the analysis in Kaissar’s article. In the context of Marcellus’ CCP portfolio in India, we have made the same point: the investment returns which we have delivered have been strongly underpinned by EPS growth ( The problem for Indian investors is that the same cannot be said about the broader Indian market which over the past 6 years has rallied strongly with EPS growth barely running at 5-6%.

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Note: the above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India as a provider of Portfolio Management Services. Marcellus Investment Managers is also regulated in the United States as an Investment Advisor.

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