From GS Economics Weekly, May 11, 2007
The economy has slowed, but the equity market/corporate earnings motor on - what gives?
Sometimes people get perplexed: if the (US) economy has slowed so much through to Q1 2007, why are corporate earnings still so strong?
Here is a useful research piece that details the apparent discrepancy.
"Although real GDP growth has decelerated substantially over the past year, major equity market indices such as the S&P 500 continue to register strong growth in company revenues and earnings.
This discrepancy is partly due to measurement issues, but more fundamental factors are also at work. First and foremost, GDP is usually measured in real (volume) terms, but economy-wide headline inflation of near 3% must be added to calculate revenue growth. Second, the S&P 500 has a different industry mix that has seen higher growth than the economy as a whole. Third, revenues from US companies' international operations have been growing rapidly, but these are excluded from GDP.
The outperformance of S&P revenues versus economic growth should continue, even after adjusting for inflation. Though our forecast suggests that the industry mix of US growth could shift to be somewhat less favorable for the equity market over the coming year, a continued strong global growth environment and a weakening US dollar should help international sales to remain robust and offset a less friendly composition of US growth."
Other Articles:
