Is the stock market designed to go up?

It sounds suspiciously easy.

Put money into the stock market, sit back, and watch it climb. No effort required, other than occasionally checking your balance and feeling smug. The idea that stocks are "designed" to go up over time has become a kind of folk wisdom among investors.

But is it really just folk wisdom? Some of the biggest forces behind rising markets – from inflation policy to index construction to government bailouts – aren't accidental. They're built into the systems that run our economies and even the markets themselves.

In this article, we'll dig into the mechanics that quietly nudge markets upwards, the policies and behaviours that reinforce them, and why even a market that looks like it's "designed to go up" can still run off the rails.

The case for up

Plenty of forces tilt the stock market upwards over time. They're not infallible, but they have been remarkably persistent.

Before getting into the arguments, have a gander at the chart below. It shows the S&P 500's march from January 1928 to March 2025. The rise amounts to a 1,632% increase. A £100 investment would have grown to £1,732 – and that's before accounting for dividends.

Is this just because of "good business performance" – or are other things having a large impact on prices?

Inflation quietly lifts all boats

When people say stocks "go up", they usually mean the number on the screen gets bigger. But that doesn't always mean you're richer.

There's a difference between nominal returns (the raw numbers) and real returns – what your money can actually buy after accounting for inflation.

Real returns matter because inflation makes everything more expensive. If your investments go up 5%, but the price of living also goes up 5%, you've not gained any purchasing power.

But here's where it gets paradoxical: inflation doesn't just erode wealth – it also inflates it.

When prices rise, companies often charge more for their products. Revenues grow. Profits potentially rise (at least on paper). And because stock prices track those profits, they often rise too.

This helps explain why markets can drift upwards even when the economy is standing still. Stocks don't always beat inflation – there will be many years where they don't – but they often keep up (and have regularly outperformed it in the past).

And not to get all tinfoil hat, but this isn't an accident.

It might sound like the kind of thing you hear three hours into a YouTube rabbit hole – "the system's rigged to make your cash worthless!" – but there's more than a grain of truth to it.

Governments don't just try to manage inflation; they need it. A bit of inflation keeps people spending instead of hoarding cash. It can also help erode the relative value of national debt. It makes GDP look rosier.

Even central banks aim for it. The Bank of England and the US Federal Reserve both have official inflation targets – and they're not zero. They aim for around 2% a year, though it's almost always higher. That's not inevitable slippage; it's deliberate.

A little inflation is seen as healthy: it gives businesses room to raise prices and wages. It also gives consumers a reason to buy that new fridge today before it costs more tomorrow.

Simplify index funds and their confusing fees

Get our free cheat sheet to make everything easy

Send me the sheet

Central banks and governments backstop crashes

Stock markets don't rise by sheer willpower. Policymakers often help. When economies falter or markets crash, central banks like the Bank of England or the US Federal Reserve step in.

They usually cut interest rates to make borrowing cheaper.

They sometimes pump money directly into the financial system. This is called "quantitative easing". It means buying up bonds and other assets to flood the system with cash. When saving pays little and borrowing costs less, investors often move into stocks instead.

We saw this after the 2008 financial crisis and again during the 2020 pandemic. Markets that looked broken bounced back sharply once central banks stepped in. Nothing steadies a panicking market like the promise of free money.

In the worst crashes, government bailouts (like the £65 billion of taxpayer money that went into RBS and Lloyds back in 2008) and stimulus payments have kept companies alive.

There is even a nickname for this in the US: the "Fed Put". It means the market expects that if things get too bad, the central bank will step in and put a floor under falling prices. It's like walking a tightrope while knowing there's always a giant safety net below.

An argument could be made that while the potential for growth is infinite and uncapped, the potential for complete disaster is somewhat mitigated. This could suggest an imbalance between the likelihood for long-term growth and decline.

Survivorship bias in indexes

When people say "the market" rises, they usually mean an index like the S&P 500 or the FTSE 100, or a global benchmark such as the MSCI All-World Index.

These are not fixed lists, and are updated multiple times per year.

It works a bit like a football league where the lowest-performing teams are relegated and replaced by rising clubs. Over time, the constant renewal lifts the quality of the league. The same happens with indexes. The market ends up tracking the winners and quietly dropping the losers.

Because the weakest performers are removed, they no longer drag down the index. What remains is a group of companies that have, by definition, survived or outperformed – which helps explain one of the reasons why indexes have risen over the long term.

Damien took a much deeper dive into survivorship bias in the stock market over on Damien Talks Money:

Company incentives to boost share prices

Public companies have strong reasons to keep their share prices rising. Their bosses usually get paid more when the share price goes up. Stock options and bonuses often depend on it.

To help the cause, companies do a few things: they reinvest profits to grow, they cut costs to become more efficient, and they pay out dividends to shareholders. Another tactic is the share buyback.

A share buyback happens when a company buys its own shares from investors. It means there are fewer shares left on the market. If the same company profits are spread across fewer shares, each one becomes more valuable. It's like replacing a crowded pub lunch with a ten-seat chef's table.

Many large companies spend billions on buybacks, especially during rough patches. Buybacks also send a signal to investors that the company believes it is strong enough to spend its own cash this way.

Company directors are also legally obliged to act in the best interests of shareholders.

In the UK, the Companies Act 2006 requires directors to promote the success of the company for the benefit of its members. This fiduciary duty strengthens the bias towards long-term growth and shareholder value.

Investor optimism

Investor behaviour itself contributes to the stock market's upward bias.

Over time, people have come to believe that investing in shares, while risky in the short term, tends to reward patience. This belief has a self-fulfilling effect.

When markets fall heavily, many investors see it as an opportunity rather than a reason to flee. Buying "stocks on sale" is a common reaction, and it often helps to stabilise prices.

History supports this optimism.

Over the past three decades, the US stock market has ended the year higher roughly 78% of the time. Since 2001, the FTSE 100 has been positive in about 71% of years. Millions of individuals investing for retirement each month create a steady inflow of money that pushes prices upwards, regardless of short-term spooks.

The financial commentariat also keep everyone humming a happy tune.

Analysts' compensation often depends less on the accuracy of their forecasts and more on maintaining good relationships with large clients.

For example, when you look up a major share like Amazon, it's not unusual to find 46 analysts out of 47 rating it a buy, with an average 12-month price target 31% higher than today. Optimism of that kind is hard to resist. It can fuel a self-fulfilling cycle of buying that pushes prices higher, even if the actual results often fall short of the lofty expectations that sparked the frenzy.

The system works best when people keep believing.

Optimism, reinforced by habit, marketing, and the occasional glossy brochure, has helped to carry markets upwards for decades. The economist John Maynard Keynes called it "animal spirits" – a stampede of belief that can often defy logic and carry the whole herd forwards, leaving the lone sceptic in the dust.

People want to invest. They're encouraged to invest. They're auto-enrolled into investments without even knowing it via their workplace pensions. And they're incentivised to invest through tax breaks.

It's almost a bit ponzi-like. Emphasis on the "almost."

Economic growth = rising profits

Over the long run, stock prices reflect the growth of real businesses.

Economies have expanded steadily for centuries, driven by more people, better technology, and rising productivity. When the economy grows, companies usually sell more, make more, and hand back more to shareholders.

Since the early 1900s, company profits have been the main fuel behind stock returns. Dividends and reinvested earnings build wealth far more reliably than hype or hot tips. As the world's economic pie has gotten bigger, so have the slices that shareholders tuck into.

Some sceptics argue that growth can't continue forever. Innovation might slow. The low-hanging fruit of past revolutions – electricity, the internet, smartphones – is harder to replicate.

But then new technologies like AI pop up, completely blindsiding naysayers who'd claimed the global economy was just spinning its wheels in a muddy ditch.

It's also worth noting that governments have long tried to keep the growth engine running – through policies on migration, industrial investment, and targeted tax breaks. This is yet another example of how powerful forces operate in the background to goose up the stock market.

But despite how many powerful forces are aligned to keep the bull trotting happily, they can never stop the periodic reemergence of the gloomy bear.

Markets might tend to go up, but it's less like a helium balloon ascending towards the clouds and more like a yo-yo riding an escalator.

Optimism has limits. Economic growth can stall for years. Central bank rescue missions don't always work as intended. Stocks are not necessarily a one-way ticket to easy riches, and come with many risks.

Why it's not so simple

The long-term rise of stock markets might seem inevitable based on the above, but before getting too comfortable, it's worth looking at some real examples where investors faced decades of disappointment.

The chart below shows the Nikkei 225, Japan's main stock market index, from 1982 to 2012.

Over three decades, Japan's stock market ended up almost exactly where it began.

That was despite the Bank of Japan throwing the kitchen sink at the problem – pumping trillions of yen into the economy and later becoming one of the biggest buyers of Japanese stocks through ETFs.

Warren Buffett famously said that "time in the market beats timing the market", but an investor in the Nikkei 225 over that period would likely have disagreed.

Historic gut punches

Even if markets tilt upwards over time, they don't move smoothly. There are many other examples of journeys being broken by brutal crashes and long, painful plateaus.

The US and UK have had their own dry spells.

The Great Depression offers the clearest warning. After the 1929 crash, US stocks fell by nearly 90% from their peak.

It took the Dow until 1954 to claw its way back to where it had been. That meant 25 years without any net gains for those who bought at the wrong moment. An entire generation saw their faith unrewarded.

After the dot-com bust of 2000, the Nasdaq lost about 80% of its value and did not fully recover for roughly 15 to 17 years. The broader S&P 500 also spent much of the 2000s going nowhere, with two major crashes back to back.

The FTSE 100 hit 6,930 at the end of 1999. Twenty years later, by the end of 2019, it was only around 7,542. A £1,000 investment made at the peak grew to just £1,088 across two decades. That is a gain of 8.8% before accounting for fees or inflation. In real terms, investors lost purchasing power.

There are many other extreme examples of markets and economies struggling for significant periods of time; Greece, Zimbabwe, and more.

The human factor

The average investor's experience often fails to have the same upwards trajectory as the market. That's not just because of inflation or investment fees; it is also because of human behaviour.

Timing mistakes can be costly. The market's long-term return assumes you stay invested through the crashes as well as the rallies.

In reality, many people do the opposite. They buy when everything feels safe and expensive. They sell when fear is at its highest and prices are low.

Panic-selling during a crash locks in losses. Missing the recovery that often follows crashes can be even more damaging. Studies have shown that the average investor's actual returns lag the market because of poor market timing and a habit of chasing the latest success stories too late. The upward drift of the market only helps if you avoid tripping over your feet along the way.

But there are some other human factors too: Bubbles and fads have always existed. Sometimes prices rise not because companies are thriving, but because investors hope to sell to someone even more optimistic.

And something we've seen a lot of recently: humans are in charge of government policy. Human beings will sometimes make wild and rash decisions that can negatively impact the markets – not every decision makes them go up, it works both ways.

So, what's the verdict?

Overall, we can't conclude that the market is "designed" to grow.

No set of rules forces everything to go up, and no one factor (or even a collection of factors) will guarantee success or a long-term return.

It's easy to point to a 100-plus-year record of results, but most of us don't have 100 years to invest for. Our individual timelines are much shorter in comparison – and even if we had 100 years, there's still no certainty of returns.

However, several built-in features of modern economies and equity markets give a pronounced upwards bias over long horizons. Biases don't guarantee results, but could make them more likely.

Inflation can help to push markets in the right direction, government policy around growth and tax breaks can encourage further investment too, and there are a whole host of other things that can impact the markets in similar ways. But is it intentionally set up that way? We'll leave that for you to decide.

Using an auto-enrolled work-based pension?

The fund you're contributing to might not be right for you

Send the info