Traditional and social media are always on the hunt for sensational headlines. There have been numerous posts waving red flags and while there are certain pockets of elevated valuations, we will take a step back and look at current earnings. Prices are what the market is willing to pay for the future earnings stream produced by companies.

As usual, our focus turns to the USA. The US economy is still the largest, representing about 25.9% of global Gross Domestic Product (GDP) in nominal terms, with a total size of roughly $32.4 trillion out of the world’s $125 trillion.

The S&P 500 currently represents about 40–45% of the total global listed equity market capitalisation, making it by far the single most dominant equity index worldwide. Its aggregate market cap is estimated at $61–68 trillion in mid-2026, compared to a global listed market cap of roughly $150 trillion.

What Actually Determines a Company’s Value

Market capitalisation is the sum of the market values of all listed companies, and company earnings are a foundational component in valuing any one of them. The market value of a company is determined by three factors:

All else being equal, higher expected growth rates in future earnings will yield higher valuations and vice versa.

An alternative equivalent interpretation is to multiply earnings by the Price to Earnings (PE) ratio to arrive at price. Higher PE ratios are reflective of higher growth expectations.

S&P 500 real price and earnings, showing the market pricing in higher future earnings growth since around 2019

Source: FactSet

Gauging Current Earnings Support

Gross Domestic Product (GDP) is defined as the total value of goods and services produced within a country’s borders. The earnings produced by companies are derived from the goods and services they provide to their customers. Not all goods and services are produced by listed companies and therefore GDP is not equal to aggregate company earnings.

In other words, one of the components of GDP is goods and services produced by listed companies.

Due to the link between GDP and earnings, investment analysts follow the changes in GDP as they are indicative of the economy’s ability to support earnings growth. If GDP is growing, economic output is increasing, indicating that earnings growth is sustainable. The graph below shows the growth in GDP and S&P 500 earnings, all in real terms, indexed to 1 starting in the first quarter of 1959.

Real growth in US GDP vs. S&P 500 earnings, indexed to 1 in Q1 1959

Source: FactSet

Notice that from 1959 to about 1992 US GDP grew faster than S&P 500 earnings. Since then, roles reversed and the S&P has been outpacing US GDP.

Continual Annualised Compound Growth Rate (CAGR) of US GDP and S&P 500 for the various periods is given in the table below.

Two Trends Behind the Shift

The second period (post 1992) coincides with the arrival of two major trends:

The implications were:

Where GDP Falls Short

These situations highlight a shortcoming in using GDP as there is a mismatch between the country where goods and services are counted and earnings are reported. To address this allocation problem, we can use Gross National Product (GNP). GNP is defined as the total value of goods and services produced by a country’s citizens and companies regardless of where they are produced. The next graph shows this adjustment to GNP.

Adjusting for GNP: the gap between GNP and GDP has widened steadily since the 1990s

Source: FactSet

The graph shows the increase from GDP to GNP due to goods and services produced outside of the USA by US companies and individuals. To analyse the relationship between real GNP and real S&P 500 earnings, the following graph shows the ratio of earnings to GNP.

Earnings / GNP ratio, showing two distinct regimes either side of 1992

Source: FactSet

The Consolidation Effect

Again we observe the two distinct phases pre and post 1992. There is also a third, less quantifiable, aspect to consider: listed companies have outcompeted / absorbed a significant portion of Mom & Pop shops over this period, this consolidation increased the proportion of goods and services (GNP) allocated to listed company earnings without an increase in GNP. In other words, a redistribution of existing earnings from non-listed to listed companies.

The technology employed by “Tech” companies also led to productivity gains, not only providing a competitive advantage, but also increased outputs with less inputs.

Looking Forward

The disintermediation by technology firms domiciled in the US of non-US non-tech companies is ongoing, albeit at a decreasing rate. The consolidation of smaller unlisted entities in the US into larger listed companies will also continue as economies of scale work in favour of the bigger operations. Finally, the Trump administration is working towards the re-industrialisation of the US economy, which should lead to an acceleration of GDP as the production of goods is onshored.

Real S&P 500 earnings have been growing faster than real GNP since 1992 (34 years). Even though we now understand some of the underlying forces that drove this growth, it is reasonable to expect real earnings growth to moderate to GNP growth as the scope of these drivers (to add to earnings without similar increased in GNP) diminishes.