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Dr Brana Vojcic / ARTICLE

This Analysis will blow your mind I hear every day that owning stocks and hard assets will protect you from inflation. Or earnings are going to be great -> stock will be much higher. If you believe in this, think again. Let’s examine how stocks performed in the past during inflationary periods. The Inflation Rate in the 1970s - The 1970s was structurally defined by "stagflation," punctuated by two massive double-digit inflation supply shocks (the 1973–74 OPEC oil embargo and the 1979 energy crisis). Average Inflation Rate (Decade Average): ~6.8% to 7.4% (depending on whether you look at the PCE deflator or the headline Consumer Price Index). This was nearly triple the rate of the prior two decades. The Trajectory: Inflation started the decade at a warm 5.7% in 1970, skyrocketed to a painful peak of 12.2% in 1974, cooled briefly to 4.8% in 1976, and then surged back into a massive secular cycle peak of 13.5% in 1980. S&P 500 Earnings Growth in the 1970s - This is where the major "macro twist" occurs. While the actual price of the S&P 500 index famously went nowhere for the decade (essentially trading flat from 1970 to 1980), nominal corporate earnings grew massively. According to historical data compiled by NYU Stern (Dr. Aswath Damodaran), corporate earnings for the S&P 500 shifted like this: S&P 500 Earnings in 1970: $5.51 per share S&P 500 Earnings in 1980: $14.99 per share Total Nominal Earnings Growth: ~172% total increase over the decade. Compound Annual Growth Rate (CAGR): ~10.5% per year . The Takeaway: Why This Happened If corporate earnings grew at a spectacular 10.5% per year, why did the stock market stay stuck in a brutal, flat trading range for 10 years? It boils down to P/E Multiple Compression . Because inflation was so high (averaging ~7%), investors demanded a much higher earnings yield to take on equity risk. In 1970, the market was willing to pay a P/E multiple of about 16–17x earnings. By 1979/1980, confidence was so thoroughly destroyed by stagflation that the S&P 500's P/E multiple compressed all the way down to a historic low of 7x to 8x earnings. Essentially, skyrocketing inflation completely swallowed up stellar corporate earnings performance. The companies were making more cash in nominal terms, but the market valued that cash at a massive discount—a perfect example of why tracking the macro cycle matters just as much as tracking company balance sheets.

Published May 25, 2026Updated May 25, 20266 min read
This Analysis will blow your mind I hear every day that owning stocks and hard assets will protect you from inflation. Or earnings are going to be great -> stock will be much higher. If you believe in this, think again. Let’s examine how stocks performed in the past during inflationary periods. The Inflation Rate in the 1970s - The 1970s was structurally defined by "stagflation," punctuated by two massive double-digit inflation supply shocks (the 1973–74 OPEC oil embargo and the 1979 energy crisis). Average Inflation Rate (Decade Average): ~6.8% to 7.4% (depending on whether you look at the PCE deflator or the headline Consumer Price Index). This was nearly triple the rate of the prior two decades. The Trajectory: Inflation started the decade at a warm 5.7% in 1970, skyrocketed to a painful peak of 12.2% in 1974, cooled briefly to 4.8% in 1976, and then surged back into a massive secular cycle peak of 13.5% in 1980. S&P 500 Earnings Growth in the 1970s - This is where the major "macro twist" occurs. While the actual price of the S&P 500 index famously went nowhere for the decade (essentially trading flat from 1970 to 1980), nominal corporate earnings grew massively. According to historical data compiled by NYU Stern (Dr. Aswath Damodaran), corporate earnings for the S&P 500 shifted like this: S&P 500 Earnings in 1970: $5.51 per share S&P 500 Earnings in 1980: $14.99 per share Total Nominal Earnings Growth: ~172% total increase over the decade. Compound Annual Growth Rate (CAGR): ~10.5% per year . The Takeaway: Why This Happened If corporate earnings grew at a spectacular 10.5% per year, why did the stock market stay stuck in a brutal, flat trading range for 10 years? It boils down to P/E Multiple Compression . Because inflation was so high (averaging ~7%), investors demanded a much higher earnings yield to take on equity risk. In 1970, the market was willing to pay a P/E multiple of about 16–17x earnings. By 1979/1980, confidence was so thoroughly destroyed by stagflation that the S&P 500's P/E multiple compressed all the way down to a historic low of 7x to 8x earnings. Essentially, skyrocketing inflation completely swallowed up stellar corporate earnings performance. The companies were making more cash in nominal terms, but the market valued that cash at a massive discount—a perfect example of why tracking the macro cycle matters just as much as tracking company balance sheets.
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