The stock market set new highs last week as measures of the economy, like job creation, continued to cool.
Some charts from September’s research notes, news articles, and blogs caught my eye. Instead of publishing a series of newsletters, I figured I’d do a lightning round here.
The stock market is not the economy
The U.S. stock market and the U.S. economy are closely intertwined. Yet the makeup of earnings per share (EPS), which drives stock prices, differs in several key ways from the makeup of GDP.
From Wells Fargo’s Ohsung Kwon: “Although EPS has been decently correlated to GDP (52% correlation since 1948), there is a key difference in the composition of S&P 500 EPS and GDP. The U.S. economy is predominantly services-oriented, representing over 70% of GDP, but S&P 500 earnings are almost evenly split between services and goods/manufacturing.”
For more on how the stock market and the economy differ, read: The stock market and the economy are diverging 📊
The U.S. stock market is massive
The world’s stock markets are often ranked based on performance. So, it can be easy to forget that the U.S. stock market eclipses the rest of the world.
It’s worth mentioning that the S&P 500 accounts for 80% of the value of all U.S. stocks. So, the S&P is effectively the U.S. stock market.
For more on the U.S. stock market and the global stage, read: Where in the world do S&P 500 companies do business? 🗺️
U.S. earnings growth prospects are strong relative to the world
One of the main reasons the U.S. stock market has grown so large is that U.S. companies have exhibited the best earnings growth for years. Some analysts expect this trend to continue.
From Morgan Stanley’s Katy Huberty: “U.S. Earnings Trends Continue to Lead Global Markets … Although YTD returns for U.S. stocks have lagged globally, U.S. stocks’ returns have been driven mostly by earnings growth, whereas earnings in Europe have been basically flat — European equities’ performance has been driven by multiple expansion and dividends. Looking forward, while earnings revisions breadth has turned up for all regions, the U.S. revisions uptrend is by far the strongest.”
For more on the outlook for U.S. stocks in the global market, read: Why I’m not losing sleep as the U.S. stock market underperforms the rest of the world 🌎
S&P 500 earnings usually go up 📈
The U.S. stock market has been going up for a very long time. Why?
Because earnings have been going up for a very long time, and earnings are the most important driver of stock prices.
Just take a look at this 90-year chart of S&P 500 earnings per share from Deutsche Bank’s Binky Chadha:
It’s worth mentioning that the earnings growth prospects for the large-cap companies in the S&P 500 are more favorable than those of small- and mid-cap companies.
For more, read: A very long-term chart …