Earnings of equity market must grow slower than GDP because the growth of existing enterprises contributes only part of GDP growth. The role of entrepreneurial capitalism, the creation of new enterprises, is a key driver of GDP growth, and it does not contribute to the growth in earnings and dividends of existing enterprises.
During the 20th century, growth in US stock prices and dividends was 2% less than underlying macroeconomic growth.
Source: William Bernstein and Rober Arnott, “Earnings Growth: The 2% dilution”, Financial Analysts Journal, 2003.
The total return of the market (broad market index like nifty 500) is comprised of dividend & divided growth in a long time frame. The best assumption to make to calculate future return is dividend rate at 1.5 to 2% and for dividend growth rate 2 to 3% less than the nominal GDP growth rate of India.
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