Equity Market Outlook

Nominal GDP flows directly to company toplines, and to the extent that they are not already expected, accelerations in nominal GDP benefit equities and vice versa.

Equities are an asset that represents the present value of a discounted flow of cash flows generated by corporations. The value of these assets is driven by a combination of policy rates, nominal GDP, profitability, and liquidity conditions. Maintaining a durable edge in equities requires a view of all of the above.

On the one hand, equity markets benefit from higher-than-expected inflation via nominal GDP, but on the other, they also suffer from higher-than-expected costs. This combination of features is often what leads equities to look like a real growth asset, i.e., one that benefits from real growth conditions rather than nominal ones. While this serves a

In an environment of above-target inflation and persistent deficit spending, the aggregate investor allocation to equities is likely to remain well supported until activity turns. Putting these factors together, we think that the sustained outperformance of equities has likely reached its zenith, and a correction in these dynamics can come in one o

Finally, while the economic drivers of police rates, nominal growth, and profitability determine the direction of the moves relative to other asset classes, the total size of the move in prices is driven by liquidity conditions, i.e., how much cash or cash-like assets are available to purchases equities at a given time. Part of this flow is mechani

As such, the expected path of the short rate can have significant, meaningful effects on the repricing of securities nearly immediately, while the level of the policy rate works through the economy over time.

he greater the ability of the corporation to extract profits from a pool of nominal GDP relative to what is expected, the greater the beneficial impact on equity prices.