The Wall Street-Main Street Divide in 2024
This year’s strong gains in the Dow Jones suggested an advantage for the Democrats and Kamala Harris in the presidential election, but it underscored an important reality: Wall Street and Main Street are drifting further apart. Historically, the stock market has been viewed as a bellwether for election outcomes, but this election proved otherwise, raising the question of why it failed to predict the results.
Over recent months, I tracked a model that connected the incumbent party’s chances of staying in office to the Dow Jones Industrial Average’s performance. Leading up to the election, this model gave Vice President Kamala Harris, the Democratic candidate, a 70% likelihood of defeating former President Donald Trump.
When models like this one falter, it’s an opportunity to reassess their assumptions. Is this merely an example of a model’s natural limitations? Or does it reflect fundamental shifts in the economy and markets, diminishing the model’s relevance?
In retrospect, the breakdown seems to stem from a widening gap between Wall Street’s performance and the realities of the broader economy—often referred to as the Wall Street-Main Street divide. In the past, the Dow was a fairly reliable indicator of the economy’s health and, by extension, voters’ economic sentiment. But that connection has weakened considerably over the years.
To highlight this shift, I examined the long-term relationship between quarterly U.S. GDP growth and S&P 500 earnings per share (EPS) going back to 1947, using a 20-year trailing correlation. This correlation, which reached about 40% in the early 1990s, is now just 15%, showing a steady decline, with the only notable exception being the brief alignment during the 2008-09 financial crisis.
This declining correlation sheds light on why this year’s stock market surge didn’t translate into stronger support for Harris. While Wall Street rallied, many Americans are still grappling with financial hardships. The implications are clear: traditional economic indicators may be losing their forecasting power, and analysts may need to focus more on company-specific factors rather than broad economic cycles.
Vincent Deluard, StoneX’s director of global macro strategy, recently echoed this sentiment, observing that “investors spend far too much time worrying about the next recession. Economic growth is just one small driver of stock prices. Margins and multiples matter a lot more.” In other words, understanding stock performance today may require focusing on the profitability and valuation multiples of companies rather than macroeconomic indicators.
This shift doesn’t simplify forecasting; profit margins and price-to-earnings ratios are challenging to project. However, by recognizing the diminishing role of economic growth in market performance, analysts can refocus on these crucial factors driving stock prices in the current economy.
