Every night, we hear the same story: the stock market is booming, record highs are being set, and investors are riding the wave. We’re led to believe that when the stock market soars, so does the economy, and that prosperity is just a rising Dow away. It’s a comforting narrative that has held sway for nearly 40 years in America. But beneath the headlines of surging indexes lies a different reality—one where economic fundamentals and stock market movements have grown increasingly disconnected.
The U.S. economy’s growth rate, measured by goods and services bought and sold, isn’t what it once was. Wages have stagnated, and the average American family’s net worth is still struggling to recover from the setbacks of the Great Recession. So, what exactly is the stock market measuring if not the underlying economy?
The stock market is often touted as the barometer of economic health, but in truth, it’s more a gauge of investor sentiment and future expectations than of current prosperity. It’s a mechanism where shares of companies are traded based on how much people think those shares will be worth in the future. Stock prices aren’t purely driven by a company’s intrinsic value; rather, they are shaped by the prevailing narratives investors buy into. This is why a company’s stock price can skyrocket on hype or plummet on scandals.
A brief history of stock markets
A brief history of stock markets shows us that trading has evolved from under a buttonwood tree on Wall Street in 1792 to today’s high-speed digital trading across exchanges worldwide. America’s New York Stock Exchange (NYSE) and NASDAQ are the powerhouses of this global system. The NYSE hosts major industrial giants like IBM, while NASDAQ has become synonymous with tech innovators like Apple and Google. The rise of indexes like the S&P 500 and the Dow Jones Industrial Average has simplified stock market tracking, with these indicators representing the performance of America’s largest companies.
Yet, despite the growth of stock indexes, we face the paradox of rising inequality. The benefits of a booming market haven’t reached as many people as one might think. In fact, the percentage of Americans invested in the stock market has been declining, especially among the middle class. Meanwhile, the disparity between CEO pay and average worker wages has ballooned, reflecting a system that rewards short-term profits and investor returns over long-term economic health.
The late 20th century saw the stock market become synonymous with American prosperity. Public corporations, which once helped build the American middle class, began prioritizing shareholder returns above all else. This shift, largely influenced by economist Milton Friedman’s famous 1970 essay, argued that the sole responsibility of a corporation was to maximize profits for its shareholders. The result? Corporate strategies increasingly geared toward short-term stock price boosts, often at the expense of sustainable growth and worker welfare.
Take stock buybacks
From 2007 to 2016, companies in the S&P 500 allocated over half their earnings to repurchase shares, thus artificially boosting stock prices. An additional 39% was distributed as dividends, leaving minimal resources for wage increases, research and development, or expansion efforts that could strengthen the economy over the long term. While this practice enriches investors and inflates executive compensation, it can also weaken companies and hurt broader economic growth.
In the pursuit of higher returns, corporate America has embraced cost-cutting measures such as layoffs, factory closures, and wage suppression. These strategies may be good for short-term profits and stock prices, but they come at a high cost to communities and workers. The closure of the Wausau Paper Company’s mill in Brokaw, Wisconsin, offers a stark example: a hedge fund’s demand for immediate returns led to the shutdown of the town’s largest employer, devastating its local economy.
The current stock market dynamic not only shapes corporate behavior but also influences broader societal trends. As investors push for higher returns, companies respond with decisions that prioritize shareholder interests over stakeholder needs, fueling economic inequality. This raises the question: How can we realign the stock market’s incentives to promote shared prosperity?
Reforming the stock market starts with rethinking the role of shareholders.
Stockholders can, and should, use their influence to advocate for responsible corporate practices that consider the interests of employees, customers, communities, and the environment. Long-term investment strategies can create sustainable value, fostering innovation and growth that benefit everyone—not just those with the financial means to trade stocks.
The stock market has the potential to be a force for good, incentivizing companies to make decisions that drive economic progress. It has already helped nations build wealth and enabled transformative innovations. But for the market to truly serve the public interest, it must evolve beyond its fixation on short-term gains and shareholder primacy.
Ultimately, the path forward lies in embracing a broader view of corporate responsibility, one that balances profit-making with social impact. Investors should champion this shift, recognizing that real prosperity isn’t measured solely by stock market highs, but by the strength and well-being of the society that supports it. Only then can we reclaim the stock market’s original promise as a catalyst for economic opportunity and shared success.
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