The S&P 500 is not the economy | Bot To News

Technology stocks make up nearly 24% of the S&P 500.

And that figure probably understates things, since many of the biggest companies aren’t technically in the tech sector.

Amazon and Tesla are the two largest holding companies in the consumer discretionary sector.

Facebook, Google and Netflix are in the communications sector.

Many of these companies are now so much a part of our lives that it’s hard to categorize them into just one sector, but you could say that tech stocks actually make up more than one-third of the S&P 500.

We are now witnessing mass layoffs at these companies that are so embedded in our daily lives and such a large part of the stock market:

Seems like it should be a concern for the rest of the economy… right?

I guess you could be looking at the canary in the coal mine situation where it’s the first domino to fall, but the tech industry isn’t nearly as important to the overall economy as the stock market.

Carl Quintanilla highlighted a Goldman Sachs research report this week that put tech layoffs into perspective.

Goldman notes that even in the unlikely scenario that every worker in Internet publishing, broadcasting, and Web search were immediately laid off, the unemployment rate would increase by less than 0.3%.

In fact, technology only accounts for about 2% the entire US workforce.

Partly because tech companies are more efficient. They don’t need as many employees as a steel mill.

But this disparity also stems from the fact that the stock market differs from the economy in many ways.

Sam Ro shared a great chart on his Substack last week showing the difference in composition between the S&P 500 and the US economy in terms of earnings and economic growth:

Sam notes: “The S&P 500 is more about the production and sale of goods. America’s GDP is more related to the provision of services.’

The stock market is mostly made up of corporations that make and sell things.

The economy is mostly what we do with these things.

Most of the time, the stock market and the economy move in the same direction, but occasionally they diverge.

The S&P 500 also receives about 40% of its revenue from overseas. For tech stocks, that number is closer to 60%.

Profits for the wider economy continue to hit all-time highs:

The same applies to the stock market this year:

Unfortunately, investors aren’t willing to pay as much for those gains this year because inflation and interest rates are higher.

Sometimes investors pay a high multiple of the company’s earnings, and sometimes a low multiple.

The same applies to economic growth.

See inflation-adjusted annual returns for the US stock market versus real GDP growth over decades:

Economic growth was higher in the 1940s, but stock market returns were higher in the 1950s.

Real GDP growth was basically the same in the 1970s, 1980s and 1990s. Still, the stock market was terrible in the 1970s, and terrible in the 1980s and 1990s.

In each of the first two decades of this century, growth was subdued. One of those decades saw tremendous stock market performance, while the other was horrendous.

Sometimes the stock market is inspired by the economy.

Sometimes the stock market decides to do its own thing.

I don’t know what will happen to the economy in 2023. I wouldn’t be surprised by continued growth or recession.

But even if you had a crystal ball to predict which of these scenarios is coming in the new year, it probably wouldn’t help you predict what will happen to the stock market.

We talked with Michael about the difference between the stock market and the economy, and more about this week’s Animal Spirits:

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Further reading:
It’s okay to be confused right now

Here’s what I’ve been reading lately:

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