Can the stock market outperform the regular market (economy)?

water_skipper: Can the stock market outperform the regular market (economy)?
Can the stock market outperform the regular market (economy)? There’s something I don’t understand. Let’s say there’s 100 corporations and those corporations control the entire economy. Let’s say those corporations each have a PE of 20. Now let’s say over 100 years, the economy has grown at an annual rate of 6%. If their PEs are still 20, then wouldn’t that have meant their stock value has grown at an annual rate of 6% too. I know this is a simplified example, but I just don’t understand how “the economy” can grow at a different rate than “the market.” Long answers are welcome, if they’re understandable.

Answers and Views:

Answer by rhsaunders
To some degree, because of leverage. If a company has a capitalization of $ 100 million, half of which is debt, and doubles its sales and earnings, the earnings per share roughly triples.

Answer by brian-the-brain
If the stock markets 100 companies are the whole economy then no. As long as the PE is the same you by default have locked it all in so they grow the same. But the stock market is a subset.

Thing is companies move in cycles, also some companies go out of business while others out perform. If you look at all the companies around in the market in the last 10 years you will only be looking at the companies that made it and the results will be better than average. Cause you wont find the ones that died between yesterday and 10 years ago. I think this is called survivorship bias.

Here is another bias I can think of but I have no idea what it is called:
You kind of have the same effect when you look at the economy as a whole and the companies that went public. Presumably if you took 100 companies that wanted to go public and watched them for a while, some would and some wouldn’t. Although they would all be a part of the economy. So again the net result is the stock market would contain the better companies while the economy as a whole would contain them all.

Another thing is the economy as a whole, and I presume you mean the growth in GDP (gross domestic product), has other things besides companies that are trying to make money. I think it includes government spending and non-profit organizations consumption which is presumably not done to make money so it kind of drags the whole average down.

I think what it boils down to is that you are comparing the GDP which is the total output of the economy versus a subset of for profit companies earnings growth. The susbset because of how it was chosen should be able to outperform if you really think about how you chose it.

Answer by Frank Castle
Yes.

Levi Strauss is a VERY LARGE COMPANY and they are counted in the Economy but they are not counted in the Stock Market because they are a PRIVATE COMPANY.