Economic growth must exceed expectations to generate abnormal stock returns, something increasingly difficult when starting expectations are already high. As a result, the relationship between GDP growth and stock market returns tends to be weak or even negative, despite widespread belief in a strong positive link.
This disconnect arises because markets are forward-looking while GDP is backward-looking, and stock indices often represent only a narrow slice of the economy. When investors extrapolate recent trends, valuations can overshoot, leading to disappointment even during solid growth.
Moreover, as more companies chase high growth, more players share profits. Rising competition, equity issuance, and overinvestment dilute earnings-per-share, reducing actual shareholder gains. Ultimately, it’s not growth that drives returns, but growth that is capital-efficient and above expectations.