A recent Fortune article by Ritholtz Wealth Management’s Ben Carlson argues that the past decade’s strong stock performance has been “almost exclusively driven by fundamentals, much to the chagrin of the perma-bears who blame everything that’s happened on the Fed.”

Carlson describes a formula created by the late-Jack Bogle that “allows us to check on the recent and historical fundamentals of what has been driving the rise of U.S. stocks.” He explains that Bogle broke down returns into a fundamental portion (dividend yields plus earnings growth) and a speculative portion (what people are willing to pay for earnings):

Market Returns = Dividend Yield + Earnings Growth +/- Changes in the P/E Ratio

Using this formula, Bogle outlined the three components of the formula relative to the U.S. stock market going back to 1900, which Carlson then updated through the third quarter of 2019:

Based on the findings, Carlson notes the following:

• “Shockingly, a vast majority of the gains over the past decade can be explained almost exclusively by improving fundamentals,” adding that “the change in valuations have played a minor role in explaining the gains during this cycle.”
• Earnings were “insanely low” at the end of 2010 because of the financial crisis, he argues, but adds, “I’m not saying valuations haven’t risen in this time (they have). It’s just that they’ve risen in concert with corporate profits.”
• “The fact that earnings growth has been stronger this decade than any other in history is a sign we should temper expectations going forward.”
• The change in P/E ratio is a measure of investor sentiment and is impossible to predict.
• “The 2010s have been driven more by fundamentals than every other decade over the past 100 years. That is unlikely to repeat itself over the next decade.”