Here's A Clear Demonstration Of How Stocks Are Not The Economy

Most novice investors and economists understand that the stock market does not accurately represent the health of the economy.

Among other things, the U.S. stock market (represented by the S&P 500) reflects the activities of big global U.S. corporations that have access to cheap capital and do lots of business overseas. U.S. GDP includes more directly the activities of all of the small business that only operate domestically.

RBC Capital’s Jonathan Golub recently presented this fascinating chart in his massive 83-page Investment Strategy Playbook. It charts the evolution of the economists’ expectations for Q1 GDP growth and stock market analysts’ expectations for Q1 earnings growth.

“1Q EPS was particularly strong relative to 1Q GDP,” he noted.

There are a few things that stand out: 1) The growth rate for S&P 500 earnings is much higher than the growth rate for GDP. See the y-axes. 2) Stock market analysts and economists don’t share the same sentiment in what they cover. In the right side of this chart, you’ll notice by the revisions that stock market analysts were to too conservative in what they were estimating while economists were too optimistic.

For more on the discussion of stocks versus the economy, see here, here, here, here, and here.

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