The S&P 500 index, which represents the performance of 500 large companies listed on stock exchanges in the United States, tends to go higher over time for several reasons. A main factor is the dynamic nature of its composition. Here is a more detailed explanation:

1. Economic Growth

Over long periods, the economy tends to grow, reflecting increases in productivity, population, and innovation. As the economy expands, corporate earnings generally increase, which can drive stock prices higher. Since the S&P 500 is a market-capitalization-weighted index, it benefits from this overall growth in the economy and corporate earnings.

2. Inflation

Over time, inflation leads to higher nominal prices for goods and services, which can translate into higher nominal sales and earnings for companies. This inflationary effect can contribute to the nominal increase in stock prices and, consequently, the S&P 500 index.

3. Reinvestment of Dividends

Many companies in the S&P 500 pay dividends to shareholders. When investors reinvest these dividends in buying more stocks, it can have a compounding effect, contributing to the long-term growth of the index.

4. Technological Advancements and Innovation

The S&P 500 includes companies at the forefront of innovation and technological advancements. These companies can grow at a faster rate than the overall economy, contributing significantly to the index’s performance. As older technologies and business models become obsolete, they are replaced by newer, more efficient ones, driving economic progress and stock performance.

5. Survivorship Bias and Adaptation

As mentioned earlier, the composition of the S&P 500 is not static. Companies that underperform or fall behind in market capitalization can be removed from the index, while those showing strong growth and market relevance are added. This process means the index tends to reflect the performance of the current leading companies in the economy. The continuous adaptation ensures the S&P 500 remains relevant and tends to grow over time, as it represents the more successful and adaptive segments of the economy.

6. Market Sentiment and Investor Behavior

Over long periods, investor optimism and the willingness to invest in equities can drive prices higher. While market sentiment can fluctuate dramatically in the short term, leading to volatility, the long-term trend has been upward due to the factors mentioned above, along with a consensus that investing in the stock market is a good long-term investment strategy.

Together, these factors contribute to the long-term upward trend of the S&P 500, despite periods of volatility and market corrections. It’s the combination of economic growth, innovation, and the dynamic, self-refreshing nature of the index itself that underpins its growth over time.