There can be confusion when reports of great economic growth are met with stock market volatility. It is always important to remember that the stock market is forward looking, while reports of GDP growth are backward looking. We talked last week about “peak earnings”, and how that may or may not come to pass. That was partly based on the idea that while economic growth is great this year, it is projected to slow in the future. Looking at the chart immediately below, we see that estimates for 2020 and 2021 GDP growth have not risen since the beginning of the year.
In addition, stock markets take many things into account that are not necessarily reflected in the pure domestic GDP numbers. Roughly 40% of the revenue earned by S&P 500 companies now comes from international sources. This means that even if the US is growing, US stock market returns may not materialize. The chart below shows how uncorrelated stock market returns and GDP growth have been over the past 28 years.