What the stock markets at all-time highs teach us

The MSCI World All Country index, the largest in terms of geographical composition, reached 797.5 points on 20 May, a new absolute historical high. The progress from the lows of mid-2009, when the market lows were recorded after the great financial crisis, is 628% (performance including dividends collected, and therefore total return, expressed in Euro) which means having multiplied the capital in 15 years with an average annual return that is more than double that of classic long-term stock returns.

Amazing without a doubt. What elements can we highlight today when many markets are at historic highs?

  1. There is good consistency between the growth in profits of the companies that make up the index and the increase in value of the index itself. EPS, as they are called in technical jargon, are the first and most important driver of the performance of a stock on the stock market and consequently of an index. They moved quite similarly to the MSCI World AC (price return): profits increased by approximately 3 times and the index multiplied by 4 times.
  2. The second component that influences the final return is the valuation understood as the market multiple at which the profits produced are valued (Price / earnings ratio or P/E in jargon). That value is on average equal to 16 in the period considered and today it is around 19.5. This means that the market has a “generous” valuation, especially when compared with the current high level of interest rates, with which it normally correlates negatively. It is this element that “joins” the x3 with the x4 of the previous point.
  3. The element that has a very high impact are the dividends collected in the past 15 years (our reference period), the importance of which is often underestimated. In fact, at a cumulative level and in the hypothesis of constant reinvestment, which is the basis of the total return performance, they were responsible for the additional 228 percentage points of return. The number seems enormous but if we consider the “cumulative” effect over time and indeed the reinvestment effect we arrive at this number. On the other hand, it has just been highlighted by the media that 2023 was the richest year ever at the level of dividend distribution in history with a total of 339 billion dollars worldwide.
  4. The extraordinary performance has an important driver at a geographical level and that is the exceptional performance of the American market in these 15 years, in particular from 2016 onwards. Any graph that compares the performance of the MSCI World with that of the most famous American index, the S&P500 highlights it very well. The investment in the USA over the same 15-year period produced respectively a +730% price return and a +1014% in total return terms, all always expressed in Euros. Considering that today the weight of the United States within the world index is close to 70% you can well understand the contribution.
  5. If we want to show the performance of other indices we are well aware of the exceptional nature of the American case. In order not to exaggerate with the numbers, we limit ourselves to the total return data only, always eurized: Bloomberg 500 (Europe) + 417%, FtseMib (Italy) + 339%, Topix (Japan) +298%, Msci Emerging Markets (emerging markets) + 274%. In other words, the real equity capital market is the United States for a whole series of sectoral, fiscal, innovation and probably also political reasons.