Jeremy Siegel, the Wharton professor who believes in stocks for the long run, stated in an interview this week that equities could go higher by 10-15% if we get higher economic growth above 3%. There is no question that higher growth can lead to top-line revenue increases but the link between economic activity and stock gains is not very strong. This is especially the case when markets have already had a strong run-up and may be pushing above fair value. The economic growth has to be matched by what is already forecast, and analysts have been optimistic about revenue and earnings for US companies.
Look at the relationship between the SP 500 and industrial production. We normalized and show that the increase in stocks has way outstripped the gain in production. We also present the relationship between GDP and equities. The dips in GDP correspond to declines in stocks but the relationship with gains is a little more suspect. It is time to be careful about pat answers between stock gains and macro growth.
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