The stock market isn't the economy. That line gets thrown around a lot—but what does it actually mean for your investment portfolio?
The central message is counterintuitive: stock markets and the real economy often travel on different tracks. GDP growth is a poor guide to equity returns across both developed and emerging markets. Index structure, firm concentration, foreign revenue exposure, policy regimes, and sectoral balances do more to shape equity outcomes than headline GDP.
In the United States, these forces are powerful. Large-cap, global firms dominate the index and harvest significant profits from abroad. A weaker dollar can lift earnings even if domestic growth slows. Fiscal deficits support corporate profits at a macro level. Trade frictions favour large, diversified firms over smaller, domestic ones. And the AI capex boom is concentrated. It channels cash to a handful of large suppliers and platform owners.
The result is a market that can rise—even when parts of the real economy feel flat. Or vice versa.
What history says
Over roughly a century, the correlation between real equity returns and real per capita GDP growth across developed markets has been negative. Despite middling real GDP growth, the US, South Africa, Sweden, and Australia score high on equity returns. Japan is the opposite.
The divergence is also stark in emerging markets. Or if you focus on more recent history. From 1988 to 2019, Mexico and Chile delivered top equity returns. But Mexico had among the lowest real GDP growth. China posted top-tier GDP growth but only middling stock returns.
Buying GDP growth is not the same as purchasing growth in earnings per share.
Why GDP is a poor equity signal
The reasons are structural:
- In many countries, particularly developing countries, much output comes from small and mid-sized private firms or the informal sector. Those profits do not accrue to listed shareholders. In contrast, index composition can be narrow. The listed market is often a small, unrepresentative slice of the economy.
- Sector concentration skews returns. Single firms can dominate an index, and their profits hinge on global demand rather than domestic conditions. South Korea's Samsung is a classic example. Its earnings move with global semiconductor and smartphone cycles, not with Korean retail sales.
- Stock markets of smaller countries are often dominated by exporters and resource firms, which are usually global price takers. Margins depend on foreign price cycles, exchange rates, and trade policy, not local GDP.
- State-owned enterprises change the profit function. They are foundational (and listed) in many countries, but maximising shareholder return is not their mission. Policy goals like employment, capital deepening, or strategic imperatives can take priority. Shareholders can be an afterthought. This is particularly true in China.
The United States: the stock market is global, the economy is local
A core driver of the US disconnect is foreign earnings and the dollar.
Foreign profit share is large. And surprisingly hard to measure due to transfer pricing, supply chains, and tax domiciles. Roughly 30–40% of S&P 500 profits come from abroad.
The dollar acts as a lever. A weaker USD lifts the translated value of overseas profits. It can offset a domestic shortfall. If 40% of the profit pie is foreign, a 2% hit to domestic revenue does not drag down the entire earnings base. Foreign beats can offset local misses.
Multinationals are different. Think McDonald's. It is listed in the US, but it is a global franchise machine. US GDP changes are only one input into its earnings.
Who's doing the spending? (Kalecki–Levy profit framework)
A handy way to think about profits is the Kalecki–Levy equation. This is a macroeconomic identity:
Corporate Profits = Investment + Dividends – Household Saving – Government Saving – Rest-of-World Saving
What this means:
- Corporate tax cuts are an obvious shift from the government to companies. But large government deficits also boost corporate profits. Companies are good at capturing government spending.
- Low household savings (like we have now) boost profits.
Why mega caps diverge further from GDP
Mega caps are even less representative of the real economy:
- Small businesses matter. Small firms employ about 45% of US workers. Their share of GDP is slightly lower but still very large.
- Government is a hidden giant. Add direct public employees and the dense network of contractors and subcontractors.
- Combined, small business plus government demand represents the vast bulk of GDP. That is far from the revenue mix of the top ten index constituents.
Large caps versus small caps: why the edge sits with scale
Large caps have structural advantages in the current regime.
Currency and geography. Multinationals with 30–40% overseas revenue gain from a weaker dollar. They can diversify demand shocks and offset weak domestic segments.
Trade barriers and supply-chain complexity. As tariffs, export controls, and local-content rules proliferate, large firms can often adapt better. They have capital, local subsidiaries, diversified supplier networks, and legal teams to route products and optimise tax and compliance. Small firms often rely on a few suppliers. Switching is slow and risky, and policy reversals can whiplash them.
Policy capture and access. Large caps are better at capturing government spend and negotiating carve-outs. In Trump's deal-centred political regime, size, lobbying capacity, and brand power help. A top-10 company can secure expedited approvals or favourable treatment that a niche manufacturer cannot.
The AI capex supercycle is concentrated. Hyperscalers—Amazon, Microsoft, Alphabet—and leading chip and networking suppliers—Nvidia, Broadcom, and a few others—are spending and receiving hundreds of billions. Data centres require specialised chips, power systems, optics, and advanced facilities. That spending accrues to a narrow set of large vendors. This is not a diffuse housing boom with thousands of small contractors. It is concentrated industrial capex.
What the disconnect does not mean
This framework can be misread. Three clarifications:
It does not say GDP is irrelevant. GDP still shapes broad demand, labour markets, and credit. It matters for rates and inflation. The point is that equity earnings respond more to corporate structure, policy, the dollar, and sectoral flows than to a single GDP print.
It does not guarantee large caps will always win. There are cycles when small caps outperform, especially when rates fall, credit loosens, and domestic demand rebounds. Policy and valuation can flip leadership.
It does not claim that the accounting identity predicts stock prices. The Kalecki–Levy equation is a guide to the profit pool, not to valuation. Multiples move with rates, risk sentiment, and growth expectations.
Risks and watch points
The bullish case for large caps has policy and macro caveats.
Fiscal path and bond supply. If deficits remain large, real yields could rise. That would pressure equity multiples, especially for long-duration growth stocks.
Antitrust and tech regulation. AI scale advantages rest on data access, cloud dominance, and chip supply. Policy could target bottlenecks in semiconductors, cloud platforms, or app stores. Margin structures could change.
Export controls and tariff shocks. Abrupt rule changes can disrupt semiconductor and cloud supply chains. Flexibility helps, but even large firms can hit hard constraints.
Dollar regime shifts. A sharp dollar rally would weigh on translated earnings and global demand and tighten financial conditions for EM customers.
AI timing. Capex is huge. The revenue ramp from AI agents and copilots is still forming. If monetisation lags buildout, investors may question paybacks and trim multiples.
Power and permitting constraints. Data centre buildouts require massive power, land, and grid upgrades. Delays can shift capex timing and supplier revenues.
Household saving and credit. If households raise their savings or face tighter credit, the private demand impulse weakens. Profits would then rely more heavily on government deficits and foreign demand.
A final word
The disconnect between the real economy and the stock market is not a bug. It is a feature of modern capitalism and market structure. Equity markets discount the future earnings of a narrow, global set of firms. GDP measures the broad, current output of an entire nation. They rhyme (usually), but they are not the same.
Several forces support listed earnings in the current cycle: foreign profit share, a still-accommodative fiscal stance, and a concentrated AI capex boom.
Risks abound—rates, regulation, trade policy, and power constraints. Do not buy GDP. Buy earnings power, capital allocation skill, and strategic resilience. That is where equity returns come from, which is what the charts tell you.
