While you may have been convinced that GDP growth doesn’t matter for equity performance over the long-term, it actually matters a great deal, according to Goldman Sachs’ Jim O’Neill.
O’Neill argues that, while GDP and stocks don’t rise together, stocks tend to rise ahead of positive GDP growth.
Current actual growth rates and forecast revisions for current year growth do not have any significant impact on equity market performance in the same period. What does impact equity returns is the expectation of growth in the year ahead. Thus equity markets may be viewed as a leading indicator of GDP growth.
For O’Neill, this is an indication that growth markets remain where to be in terms of equity investments. That’s because as an investor there you’re in a market with “growth sustainability” rather than one where growth expectations may turn negative, dragging down equity returns, like in developed markets.
Note how changes in GDP expectations drive equity returns in the U.S.:
Photo: Goldman Sachs
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