Why GDP doesn’t drive the stock market

A common misperception Fisher Investments Australia sees: that GDP growth correlates with stock market performance. Many argue fast GDP growth boosts stocks whilst slow growth or contraction are allegedly outright market negatives. But reality isn’t so simple. Stocks and GDP represent different things—and often diverge.

To see why, consider what stocks and GDP reflect. The former represents slices of ownership in a publicly traded company. That ownership stake entitles investors to a share of the company’s future earnings. In contrast, GDP (gross domestic product) is a government-produced measure of output that aims to capture the flow of a country’s economic activity in a given past time period. Moreover, GDP represents an economy’s private and public sectors. This includes publicly traded companies, private firms, non-profits and government entities. Now, Fisher Investments Australia knows stocks do care about economic growth, but mostly as it pertains to the effect on corporate profits. GDP doesn’t reflect this perfectly—nor does it attempt to.

For example, GDP views imports differently than stocks. GDP’s maths subtract imports from exports, cancelling out its effect on consumption. Fair enough if you are interested in only single-nation output, to an extent. But some publicly traded companies’ core business (e.g., a retailer or manufacturer) depends on imported goods. Perhaps they sell imported clothing or food—or do something that adds further value to imported components. Regardless, treating them as a negative or no positive influence on growth, cuts against those businesses’ realities. GDP also tabulates government spending as a positive. Yet government investment isn’t always and everywhere beneficial, in Fisher Investments Australia’s opinion, especially if public expenditures crowd out more efficient private investment.

Recent history shows rapid GDP growth doesn’t necessarily propel stock market outperformance. Consider China, which has boasted one of the world’s fastest GDP growth rates in the 21^st century. From 2001 – 2023, China’s average annual GDP growth rate was 8.3%, much swifter than Australia’s 2.8% or OECD nations’ 1.8% respective average annual growth rates.[i] Yet over the same timeframe, Chinese stocks outperformed global developed stocks in just 10 years (when denominated in Australian dollars).[ii] Less than half!

Slow growth also needn’t prevent stocks from a great year. See Germany in 2023, where GDP contracted on a quarterly basis in three of four quarters.[iii] Yet German stocks rose a robust 22.4% in AUD, not far off global stocks’ 23.0%.[iv] Relatedly, long stretches of GDP growth without contraction doesn’t ensure equity market leadership. Australia didn’t experience a recession from 1992 – 2019, but Aussie stocks didn’t always lead global markets. Yes, there were periods of Australian outperformance (e.g., 2003 – 2007)—but also stretches when Australia trailed (e.g., 2013 – 2015, 2017 – 2019).[v]

Based on Fisher Investments Australia’s reviews of market history, stocks care less about specific GDP growth rates and more how reality aligns with expectations. That means if the consensus forecast is for no GDP growth or contraction, mixed or tepid expansion can surprise positively—boosting investors’ moods and encouraging them to bid stock prices higher. That appeared to play out in the aforementioned example of Germany in 2023.

However, the economic environment is also just one of many factors stocks consider. A country’s economy may grow rapidly, but heavy-handed, interventionist government policy could create uncertainty and discourage risk-taking. That is one reason why mainland Chinese stocks have struggled in recent years, according to Fisher Investments Australia’s research.

Finally, a country or region’s sector composition matters a lot to stock returns, too. Australian equity markets have larger exposures to the Financials and Materials sectors relative to an index of major global developed nations. When one of those sectors is in favour (e.g., during a commodity super-cycle), Australian markets may enjoy a period of equity leadership. So, don’t ignore economic growth, but Fisher Investments Australia warns against treating it as the most consequential variable when making investment decisions, either.

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