Why Do Stocks Go Up Over the Long Term?

The S&P 500 index, which consists of 500 large-cap American companies, has returned an impressive 9% annualised return since its inception. That equates to doubling of investors money every eight years.

The Straits Times Index (SGX: ^STI), Singapore’s benchmark stock index, has not been that far behind either, reporting an annualised return of around 7.8% since its inception in 1998. So why do stocks keep appreciating and can this continue?

The reason for this is usually linked to earnings growth, which increases its asset base and hence increases shareholder value.

Population Growth

The first and probably most obvious factor for greater earnings potential is the growing population. More people means more customers that a company has the potential to sell to. This, in turn, translates to a higher number of transactions and greater profits.

The world has seen its population grow at an exponential rate since the early 1900s. The global population had grown from just 1 billion in 1800 to 7 billion in 2012. This figure is expected to increase to 8.4 billion by 2030. That is a staggering growth rate. Although population growth is set to decelerate in the future, there is still likely to be a significant increase in population in the next 60 years.

This can only be good for businesses, as new customers mean growth and new business opportunities. The bulk of the world’s population growth will, however, be concentrated in developing economies. Therefore, companies that can reach out to these people will see the greatest benefit from the population surge.

Innovation and Research

Advances in technology can create new industries, jobs, and new business opportunities for companies. The Internet, for example, allows businesses to reach out to customers directly. This creates a whole new industry that thrives on access through domestic computers.

Even before this, innovations such as cars and aeroplanes created new opportunities for businesses to tap into and allowed people to interact and travel like never before. These innovations have been great for businesses that used to rely on traditional means of transport.

Innovations and technological advancements have played a role in the growth of business opportunities around the world. This does not seem to be slowing down, with new technologies such as the autonomous cars, new medical technologies, and improving artificial intelligence just around the corner. All of which can mean greater business opportunities and greater profits for companies that can tap into their great potential.

The Foolish Bottom Line

Historically, stocks have tended to trend upwards and this is not just a coincidence. The future still looks bright for stocks, as population growth and technological advancements will continue to play its part in nurturing business opportunities around the world.

Meanwhile, for more (free!) investing insights, sign up here for your FREE subscription to The Motley Fool's investing newsletter, Take Stock Singapore. It will teach you how you can grow your wealth in the years ahead.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Jeremy Chia doesn't own shares in any companies mentioned.