Lesson 2 of 7
The 1973-74 bear market
High multiples on the era's favourite growth stocks met rising inflation, and produced two losing years in a row for the S&P 500.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
Who writes thisEditorial processLinkedIn (opens in a new tab)X (opens in a new tab)
In one minute
- A group of the era's most admired growth companies traded at high multiples on the reasoning that their growth alone justified the price.
- The S&P 500 with dividends fell in both 1973 and 1974, a two-year decline rather than one bad year.
- A company can grow exactly as forecast and still be a poor purchase, if the multiple paid for that growth falls further than the growth arrives.
The 1973-74 bear market was not one bad year. The S&P 500 with dividends fell in 1973, then again in 1974, and the lesson drawn from it was about the price paid for growth, not the growth itself.
Two losing years in a row
- 197218.9%
- 1973−14.8%
- 1974−26.4%
- 197537.2%
- 197623.6%
Two down years compound, they do not add
A 14.8 percent fall followed by a 26.4 percent fall is not a 41.2 percent decline. Compounded, $1 becomes $0.852 after the first year and $0.627 after the second, a cumulative fall of about 37 percent over the two years together. A second bad year does more damage than the same-sized first one, because it is falling on a smaller base.
Growth stocks met a rising discount rate
Inflation and the interest rates set against it rose through the decade. A stock's earnings yield, the E over the P, has to compete with the yield on a bond, and a rising rate makes a given year of profit worth less today. The companies that had commanded the highest multiples had the furthest to fall when that rate rose, because more of their price rested on distant growth than on profit already in hand.
What the chart's other years show
The two bars either side of the fall matter as much as the fall itself. 1972 was a strong year, the kind that makes a high multiple feel earned rather than risky. 1975 and 1976 rose strongly off the low. The table cannot say which shares led that recovery, or whether the favourite growth stocks ever returned to their 1972 prices. What it shows is that the price paid is tested in both directions.
Good company at any price
The lesson this bear market is remembered for is not that the era's favoured companies were bad businesses. Many kept growing. It is that "a good company at any price" is not a discipline. The price paid sets the return, and a buyer who ignores the multiple is betting that the market will keep paying it, not that the business will keep earning.
Check yourself
The S&P 500 with dividends fell 14.8 percent in 1973 and 26.4 percent in 1974. What was the cumulative fall over the two years?
- 41.2 percent, the two years added together
- About 37 percent, because the second fall compounds on a smaller base
- 26.4 percent, since only the larger year counts
Show the answer
Answer: B.
$1 becomes $0.852 after the first year and about $0.627 after the second: a cumulative fall of roughly 37 percent, less than the two percentages simply added.In the worked example, earnings doubled exactly as forecast. Why did the price not rise?
- The company issued new shares
- The multiple the market paid for that growth halved at the same time
- Dividends absorbed all of the gain
Show the answer
Answer: B.
Price is earnings times the multiple. Earnings doubling and the multiple halving cancel out exactly, which is what a falling multiple can do to a right forecast.As a discipline, what did the 1973-74 bear market warn against?
- Ever buying a growing company
- Paying any price for quality, on the assumption that growth alone justifies it
- Holding a stock for more than one year
Show the answer
Answer: B.
The companies were not the problem. The price paid for their growth was, once the multiple the market was willing to pay for that growth fell.Sources
- Berkshire Hathaway 2025 annual report, table "Berkshire's Performance vs. the S&P 500": S&P 500 with dividends, by calendar year, 1965 to 2025.
What this leaves out
- The worked example uses round, invented earnings and multiples chosen to make the arithmetic checkable by hand, not a record of any real company.
- The annual figures come from one table and say nothing about which sector or company fell furthest; that breakdown is not on file for this period.
- The table's returns are nominal; with inflation high in 1973-74, the loss in purchasing power was larger than these figures show.
- Nothing here is advice about any security or about what multiple to pay for one.