>But if stock market returns are proportional to profits, and profits can
>only grow over the long run at the same rate as GDP growth (because if
>they outsripped it consistently, eventually they would outstrip GDP), that
>seems to mean it's impossible for the stock market to generate an
>historical average return that's greater than GDP growth over the long
>run. But hasn't it done just that, by historically returning 6%? Under
>this assumption, shouldn't profits have eaten the whole economy long ago?
The rule of thumb is stock prices grow with the economy and you get a dividend bonus on top of that (so the 7% long-term real return is 4% growth plus 3% dividends, or something like that). The dividend yield on the S&P 500 is about 1.1%, so you're hoping for consistent 6% growth rates, which doesn't seem in the cards.
Doug