A global pandemic crippled the U.S. economy in a matter of weeks. After bottoming out on March 23, we witnessed the U.S. stock market’s sharpest rally in recent history. Many critics state that the rapid recovery in the stock market is not reflective of the true health of the economy. In this article, we will dissect the hypothesis that the ‘stock market is not the economy’ through an analysis of underlying fundamentals instead of market capitalization.


To better understand the industrial composition of the S&P 500 versus the U.S. economy, we mapped S&P 500 companies to gross domestic product (GDP) industry groups. We then aggregated the revenues and net incomes (non-GAAP) of S&P 500 companies and compared them with the value-added* measure of GDP (table below).


Economic industry groups % GDP S&P 500
As % of total revenues As % of net income (non-GAAP)
Mining 1% 7% 2%
Utilities 2% 3% 3%
Construction 4% 1% 1%
Manufacturing 11% 25% 28%
Wholesale trade 6% 6% 1%
Retail trade 5% 16% 7%
Transportation and warehousing 3% 3% 1%
Information 5% 13% 23%
Finance and insurance 8% 12% 17%
Real estate and rental and leasing 13% 1% 1%
Professional and business services 13% 6% 12%
Health care and social assistance 8% 9% 4%
Arts, entertainment, and recreation 1% 0% 0%
Accommodation and food services 3% 1% 1%
Others 17% 0% 0%
Source: Big Data Federation, Inc.
* Totals may not equal 100% due to rounding. S&P 500 companies do not directly map to the category “Others” (includes farming, livestock and educational services). An industry’s value added equals the difference between the price at which it sells its products and the cost of the inputs it purchases from other industries.


As shown above, the S&P 500 composition does not mirror that of the economy. So next we took a more holistic approach in analyzing the interconnection between the aggregate fundamentals underpinning equities and the economy. The results are eye opening.


The chart below demonstrates the resemblance of total quarterly U.S. GDP (seasonally adjusted) with total quarterly revenues of S&P 500 companies for the past 20 quarters (this pattern holds for when we run the numbers back further in time). As a matter of fact, for this time period, quarterly GDP shows 96% correlation with total S&P 500 revenues and 85% correlation with total S&P 500 net income (non-GAAP).



In conclusion, the fundamentals of the equity market and the economy are one and the same, i.e. we disprove the hypothesis that the ‘stock market is not the economy.’ The connection shows no lag; for example, in 2Q20 the GDP dropped 8.5% on a year-over-year basis while the S&P 500 revenues dropped 8.7%. In other words, economic impacts are reflected in the equity fundamentals almost immediately.


One major question remains, if the market efficiency theory holds, why doesn’t market capitalization of equities follow the very fundamental it is based on? We will analyze this topic in future articles.