United States: When Wall Street Disconnects from the Real Economy
The continued rise of the S&P 500 conceals an increasingly visible divide. Behind the stock market performance, the profits of large publicly traded companies now follow a significantly different trajectory from those of the American economy as a whole. This disparity raises questions about the strength of the ongoing cycle.
An unprecedented gap between stock market profits and economic profits
For decades, the profits of S&P 500 companies have moved in tandem with those of the US economy as measured by national accounts. The chart published by DWS highlights a clear break in this relationship since the pandemic. The operating profits of the index's companies have experienced a strong acceleration, while the overall profits of US companies, after taxes and excluding valuation effects, are growing at a much more moderate pace.
This divergence has intensified since 2022. While macroeconomic indicators point to a gradual slowdown, particularly in the labor market, the S&P 500 has continued its upward climb, showing an increase of more than 75% since the end of 2022. An unusual pattern, suggesting a disconnect between stock market dynamics and the underlying economic reality.
The Extreme Concentration of Value Creation
The main explanation lies in the increasing concentration of profits. A handful of large tech companies are driving the majority of earnings growth for the S&P 500. These groups benefit from massive economies of scale, high pricing power, and, more recently, substantial investments in artificial intelligence. Stock buybacks further amplify this effect, mechanically supporting earnings per share without reflecting an equivalent improvement in the overall economy.
In contrast, aggregate macroeconomic profits include the situation of a much broader array of companies, particularly mid-sized businesses that are more sensitive to financial conditions. The rapid rise in interest rates has increased their cost of capital, while higher unit labor costs have squeezed their margins. This contrast explains why « macro » profits struggle to keep pace with stock market profits.
The Return of the K-Shaped Recovery in Markets
According to Johannes Müller, head of research at DWS, this setup resembles a return to the « K » dynamic. During the pandemic, this image was used to describe a two-speed economy, where some sectors thrived while others struggled. Today, the phenomenon is repeating itself within the stock market: a few companies see their profits soar, while the rest of the economy advances much more slowly.
This « K » logic makes the market more dependent on individual trajectories. As long as the euphoria surrounding AI fuels growth prospects for tech giants, the index can continue to rise. However, the lack of tangible evidence for a macroeconomic productivity gain commensurate with the trillions invested in AI raises concerns. In the event of disappointment, such a concentrated market could prove to be more vulnerable.
This content has been automatically translated using artificial intelligence. While we strive for accuracy, some nuances may differ from the original French version.
