How much does a fall in GDP growth matter to corporate earnings?

Tina Fong

Our research explores the differing relationships between a country’s economy and the earnings growth of its stock market.

Ongoing talk of the risk of recessions is prompting questions about the strength of the relationship between economic growth and corporate earnings.
Corporate earnings are one of the key drivers of equity returns. So, it is no surprise that investors are keenly watching the health of domestic economies and their potential impact on market earnings and return prospects.

When an economy is performing well, consumers often spend more and business activity increases. As a result, corporate profit margins improve, leading to higher earnings growth. Conversely, during recessions when demand is weak, earnings growth typically turns negative.

Chart 1 shows that there is a positive relationship between EPS (earnings per share) growth and real GDP growth in the US over the last 50 years.

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