Myth-Busting: The Economy Drives the Stock Market

Wait, what else drives it?

March 2023 Reading Time: 10 Minutes. Author: Nicolas Rabener.

This research note was originally published by the CFA Institute’s EI blog.



  • US real GDP growth and US stock market returns were positively correlated since 1900
  • However, the correlation was not consistent and even turned negative
  • The evidence of this relationship from other countries is mixed


Switch on Bloomberg TV or CNBC at any time of the day, and there is a good possibility the host will be explaining the daily ups and downs of the stock market as a function of the latest economic news. Unemployment is down, stocks are up. Inflation is up, stocks are down. And so on.

The underlying assumption is that the stock market represents the economy. Yet most economic data is released on a quarterly basis, and on a good many days, there isn’t any significant news anyway. So, what do stocks trade on on those days?

And what about when the stock market gets carried away? After all, too much investor enthusiasm led to technology bubbles in 2000 and 2021, for example (read Growth ETFs: Performance & Factor Exposures). While economic growth was strong during those times, in hindsight it hardly justified such sky-high returns and valuations.

How much does the economy matter to the stock market? Let’s explore.


The US economy is driven primarily by consumers whose spending accounts for 70% of GDP. The remaining 30% is split almost equally among private investment and government spending. Net exports are close to zero, as the United States imports slightly more goods and services than it exports.

This composition is hardly reminiscent of the US stock market, where technology, health care, and financials are among the top three. Naturally, many companies sell directly to the consumer, but more tend to focus on businesses and international markets. For example, Apple, the public company with the largest market capitalization, generates close to 70% of its sales abroad. So, does the US stock market really represent the larger economy?

Well, the annu