What’s Growth Got to Do With It? Equity Returns and Economic Growth

Abstract

Equities are generally considered to be growth assets by investors. This implies that equity market returns show positive correlation with economic growth. Empirical investigations into the relationship between economic growth and large-cap equity market returns have not been able to confirm this positive correlation. This effect might be due to the global nature of large-cap corporations dominating the stock markets of almost every country. These global companies might be less prone to local changes in economic development than smaller, more locally oriented, and less sophisticated corporations. In this article, we analyze the correlation of equity market returns with economic growth for small, medium-size, and large corporations in 22 developed and 22 emerging nations. We find no evidence of a positive correlation between stock market returns and real gross domestic product (GDP) per capita growth in any of these cases. Similarly, we find no evidence of a positive correlation between real earnings growth of large-cap stocks and real GDP per capita growth across countries, indicating that other factors such as population growth, entrepreneurial activities, and international competition for market share play an important role for real earnings growth.