Stocks Don’t Have an “Intrinsic” Return

Key Insight:
GE’s EPS doubled from 1999 to 2007 — but its stock price dropped. Market sentiment matters more than earnings alone.

The Myth of Built-In Returns

Many investors assume that stocks naturally go up over time — that there’s something intrinsic about equities that ensures long-term growth. It’s a comforting belief, but one that doesn’t hold up under scrutiny. What we often call the 'intrinsic return' of stocks is actually the result of two measurable forces:

• Growth in corporate earnings
• Changes in the price investors are willing to pay for those earnings — the P/E ratio
  

Sentiment Drives Short-Term Returns

Over long horizons, earnings growth tends to dominate. But over shorter periods — even as long as a decade — changes in valuation (P/E) drive most of the market’s movements. Studies show that for holding periods under 10 years, more than 75% of price movement in the S&P 500 comes from valuation changes, not earnings. This means investor sentiment plays a disproportionately large role in short- to mid-term returns.

Case Study: GE’s Lost Decade

A powerful example of this dynamic is General Electric in the early 2000s. From 1999 to 2007, GE’s earnings per share more than doubled — an impressive 105% increase. But its stock price fell from about $38 to $33. Why? Because the P/E ratio investors were willing to assign to those earnings collapsed, falling from 35x to 15x. GE didn’t underperform as a business — the market simply lost enthusiasm for its shares.

• GE EPS Growth: +105%
• GE Stock Price Change: –13%
  

Understanding the Drivers of Return

This case — and countless others like it — illustrate that stock returns are not automatic. They depend on a mix of business fundamentals and shifting market psychology. When investors are optimistic, they bid up valuations. When sentiment turns, even strong fundamentals can’t protect a stock from price declines. This has real implications for portfolio strategy. Simply buying and holding isn’t a guarantee of success if you enter at an inflated valuation.

Takeaway

The myth of intrinsic returns invites complacency. But real-world data shows that returns are earned, not given — and they’re subject to meaningful variation depending on valuation, market conditions, and sentiment. As investors, we must remain attentive to these inputs and avoid overpaying in periods of euphoria. Being selective, managing risk, and understanding return drivers is more reliable than hope.