What fundamentals ultimately drive share prices?

Shareholder return is the holy metric by which all equities are compared, but what factors actually influence the returns shareholders get from their equity holdings?

In October 2023, Morgan Stanley’s Michael J. Mauboussin and Dan Callahan put out a paper that offers a framework of the key components that drive shareholder returns. 

To clearly show how these factors contribute to shareholder return, the paper broke down the annualized shareholder return of the S&P 500 from 2012 to 2021, which we’ve illustrated below. 
As you can see, price appreciation is the biggest primary driver that influences shareholder return, followed by dividends and dividend reinvestment. 

Earnings per share growth (driven primarily by net income growth) and how price-to-earnings multiples change are the main factors that dictate price appreciation. 

So what does this all mean ultimately? Net income growth and the resulting earnings per share growth are the most important factors when it comes to total shareholder return.

So when you’re looking to figure out the potential specific winners of this decade, keep an eye on their earnings and income growth. 
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