IN FOCUS6-8 min read

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

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

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Tina Fong

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.

Some equity markets have greater exposure to overseas revenues…

We can also examine the proportion of revenue companies generate overseas to understand the domestic orientation of an equity market and its earnings.

The companies in countries such as China and Brazil receive most of their revenues from domestic sources. In comparison, the UK and German stock markets have more multinational companies which generate the majority of their revenues overseas.

Overall, an equity market with lower exposure to foreign revenues is more likely to have a stronger relationship between corporate earnings and domestic growth.

…and rewiring of the global economy will have an impact

With the re-wiring of globalisation, some countries – particularly in the emerging world – are likely to be the key beneficiaries of changes in supply chains.

In the case of the US, the economy could benefit from reshoring where globalisation trends reverse because of what we are calling the “3D Reset”, with deglobalisation, demographic and decarbonisation trends set to become important drivers of economic activity over the medium term.

For other countries, these changes might increase the importance of overseas activities and the profits being repatriated, which may not be reflected in the domestic GDP.

Domestic growth matters more to earnings in some countries

Clearly, some economies are more domestic than others. We find that the corporate earnings of countries such as China, the US, and Japan, have stronger ties with domestic rather than global growth as their gross domestic product (GDP) has low exposure to exports.

In the case of China, the relationship between corporate earnings and domestic GDP growth is modest compared to other markets. However the link between Chinese earnings is even weaker with global economic activity, particularly when less than 15% of the equity market’s revenue is from overseas.  

Meanwhile, the corporate earnings of Canada, Mexico and the US have high correlations with global growth. This is likely due to the significant contribution of US GDP to global GDP and the US being a key trading partner of Canada and Mexico.

Which parts of the market are more sensitive to domestic growth?

So far, our analysis has focused on the relationship between the overall market's earnings growth and GDP growth. However certain equity sectors have stronger connections to the domestic economy. The companies in these sectors tend to receive more of their revenues from domestic rather than overseas sources.

In the US, sectors that generate more overseas revenues, such as technology, communication services, and consumer staples, tend to have weaker correlations between the EPS growth of these sectors and GDP growth .

In contrast, sectors that are more domestically focused, such as real estate, financials, and industrials, typically have more positive correlations between earnings and GDP growth.

Even though the technology sector has a large market capitalisation in the US market and generates most of its revenue overseas, US earnings still have a strong relationship with the overall economy.

This is primarily due to the composition of the equity index, which includes a substantial number of sectors that are more domestically-oriented.


Across the different markets, economic growth does matter to corporate earnings. However the strength of the relationship is not perfect, and they do diverge.

In certain countries, earnings growth has stronger links to global growth due to a heavy reliance on exports and high exposure to overseas revenues. So, a slowdown in global growth is likely to have a greater impact on corporate earnings than a recession in the domestic economy.

In comparison, countries like the US, where corporate earnings rely more heavily on domestic activity, are expected to be more resilient in the face of a global economic slowdown.

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Tina Fong


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