There is a wide disconnect between Wall Street and Main Street, and AI could drive them even further apart This is just one more way in which Wall Street has become more disengaged from our everyday lives — something I call the Wall Street-Main Street disconnect. It wasn’t always this way. One way of appreciating this shift is the declining correlation between bear markets and recessions.
Between 1900 and 1960, for example, 84% of bear markets coincided with recession. The comparable proportion since then is just 30%. This looser relationship between the economy and the stock market is also illustrated by a declining correlation between the growth rates of GDP and the S&P 500’s earnings per share.
As you can see from the chart below, this correlation has been in a steady downtrend over the past six decades — notwithstanding the blip upward during the global financial crisis. Don’t Short Yourself offers weekly money tips to help you earn it, stack it and grow it. I would like to receive updates and special offers from Dow Jones and affiliates.
I can unsubscribe at any time. If the economy is having less of an impact on the stock market, what is taking its place? Two of the biggest culprits appear to be profit margins and price/earnings multiples.
Because of the former, a dollar of revenue translates into higher earnings, and because of the latter a dollar of earnings translates into a higher stock price. Both factors have been steadily climbing for years. To appreciate the role they play, imagine where the S&P 500 would be today if profit margins and P/E multiples had stayed constant over the past decade.
If that were so, according to my back-of-the-envelope calculations, the S&P 500 today would be 45% lower. This doesn’t mean that the strength of the economy has no impact on the stock market. But its declining correlation with the stock market is a profound development, and AI may very well accelerate it.
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