Is there a disconnect between the S&P 500 and the US economy? Have we consider a K-shaped economy?

The US economy has reported a stellar Q4.

Here are some of the highlights:

Gross domestic product, a measure of all the goods and services produced, increased at a 3.3% annualized rate in the fourth quarter of 2023, according to data adjusted seasonally and for inflation.That compared with the Wall Street consensus estimate for a gain of 2% in the final three months of the year. The third quarter grew at a 4.9% pace.

The US White House has an article about the economy. Here is an extract:

Is the American economy represented by the S&P500 index?

S&P500 - is it about the USA economy or more?

Factset has released a good article dated 31 Oct 2023 (pertaining to Q3 2023 concerning S&P500).

02-s&p-500-revenue-growth-year-over-year-q3-2023

S&P500 companies have an average YoY revenue growth of 2.1%

S&P500 companies with less than 50% revenue in the US have an average YoY revenue contraction of 2.0%

S&P500 companies with more than 50% revenue in the US have an average YoY revenue growth of 3.6%

This does not imply that the international economy is shrinking in revenue.

From the same Deloitte article in Oct 2023, here is an extract:

Emerging market economies have held up better than their developed economy peers. For example, with a reading of 52.7, the emerging market composite purchasing managers’ index remained firmly in expansionary territory in August, while the developed market composite PMI slipped below the critical threshold of 50.

01-s&p-500-earnings-growth-year-over-year-q3-2023

S&P500 companies have an average YoY earnings growth of 2.7%

S&P500 companies with less than 50% revenue in the US have an average YoY earnings contraction of 4.7%

S&P500 companies with more than 50% revenue in the US have an average YoY earnings growth of 6.8%

This does not imply that the international market is less profitable.

03-s&p-500-aggregate-geographic-revenue-exposure-percent

S&P500 revenue exposure is made up of 59% from the United States and 41% from international.

S&P500 has 41% of its revenue stream from non-US (international) market. Digging deeper, the 2.1% YoY revenue growth by S&P500 companies would comprise 0.86% from the international market and 1.24%. These 2 markets combined to give the 2.1% YoY revenue growth by S&P500 companies (for Q3/2023).

When we look at the S&P500, we understand that over 40% of the revenue is from non-US (international) markets and this does not represent the American economy.

S&P500 has attracted interest from international investors and thus, the fund inflow is from combined sources of American and non-American investors.

K Shaped Economy

S&P500 hitting a recent high while some sectors suffer makes sense as we are in a K-shaped economy where some sectors advance and some are in decline. S&P500 represents some of the best MNCs in the world with global revenue and thus, this does not represent the USA economy. Referencing S&P500 to the USA would be “overstating” the American economy.

Thus, we need to make appropriate & separate references to the stock market and economy.

Conclusion

The S&P500 should not be used as a reference for the American economy. The market can continue to hit record highs as some sectors continue to be in decline. Let us not allow the averages to mask the decline in some sectors or undermine the growth in others.

The economy seems to be doing well, and yet showing some concerns. Hedging is recommended for this season.

@TigerStars

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