With corporate profits at record levels and stocks regaining the ground lost during the financial crisis, Wall Street anxiously anticipates the return of the individual investors to equity markets. It may be a long wait, because the little guy may have concluded stocks are a sucker’s bet.
Investors, as opposed to traders, buy stocks in companies whose profits they expect to rise. The conventional wisdom says stock prices will follow profits up, but over the last two business cycles, that simply has not happened.
In March 2000, the S&P 500 first closed above 1500. Since corporate profits are up 135 percent but stocks have made virtually no gain since over the last thirteen years.
Buying stocks does not seem to pay any more, because most of the increased value created by higher profits has been captured by hedge funds, electronic traders, private equity funds, aggressive M&A shops, and trading desks at investment banks, which have multiplied over the last two decades.