Many people often see the S&P 500 as a proxy for the U.S. economy.
But the fallacy of this assumption can’t be reiterated enough. The most well-known difference is that S&P 500 companies generate around half of their business abroad. This makes for very different growth rates.
Deutsche Bank’s David Bianco writes about it in his lates equity strategy note.
Manufacturing dominates the S&P, but services dominate US GDP
Services make up more than 80% of US private sector jobs and 60% of US GDP. The slow recovery in services has been the main reason behind lackluster US GDP growth. But S&P 500 profits have rebounded quickly and strongly owing to their bigger exposure to commodities, capex and exports. Although not big enough to make for strong overall US GDP or employment by itself, we expect manufacturing to remain a bright spot within US GDP and should be of great benefit to non-financial S&P EPS.
Experts point to the great manufacturing renaissance that is coming for the U.S. economy, thanks to rising manufacturing and labour costs abroad.
But that’s still a ways down the road. The U.S. is still a services-driven economy. Just look at this break down of nonfarm payrolls from Deutsche Bank:
Photo: Deutsche Bank