When discussing the economy, we analyze employment, new business formation, consumer spending and income, inflation, business investment, homebuilding, and business and consumer confidence. Gross Domestic Product, or GDP, is the economy’s report card. It measures the total value of finished goods and services produced in the country by all corporations, both public and private. Real GDP adjusts that figure for inflation, making it a better measure of actual economic growth. Since 2000, real GDP growth has averaged 2.2% per year.

By contrast, market performance is based largely on expectations. It is measured by indices such as the S&P 500, which tracks the stocks of 500 leading publicly traded U.S. companies. Investors buy and sell based on what they believe those companies will earn in the future, not simply on today’s conditions. That is why the market can rise even when some current news is bad, including economic conditions. Investors may believe the news is temporary or that future company earnings will be better than expected.

Over the five years ending August 31, 2026, the S&P 500 gained 82% cumulatively, despite falling 19.4% in 2022. That translates to an annualized return of approximately 12.7%, meaning the average compounded return earned each year over the full five-year period.

The index performed well because of accommodative monetary policy (policies that kept borrowing conditions supportive), fiscal policy (government tax and spending decisions, including the One Big Beautiful Bill), and technological innovation that increased productivity. These companies have also reached historically high profit levels.

Angus: These are excellent returns. Why don’t they resonate with individuals?

Amy: Simply put, inflation, or the general rise in prices over time, is straining household budgets. Depending on a person’s income, savings, and investments, the same economy can feel very different. Someone who owns stocks may have benefited from rising markets, while someone whose wages have not kept pace with food, housing, and insurance costs may feel worse off. Political rhetoric can also make the underlying results harder to see clearly.

Angus: How are the economy and stock market connected?

Amy: Macroeconomic forces, meaning broad conditions that affect the entire economy, play an enormous role in financial markets. Changes in the cost of money (primarily interest rates) and the cost of raw materials and labor often drive the recurring periods of expansion and slowdown known as economic cycles. Approximately 70% of a stock’s movement can be explained by this broader backdrop, while company-specific factors may explain about 30%. A great company is not always a great investment at a particular price or point in the cycle. For example, some investments perform well during an economic recovery but struggle during a contraction, when economic activity is shrinking. That is why even excellent companies do not outperform every year, despite strong fundamentals (healthy sales, profits, cash flow, and finances).

The second connection is the wealth effect. This is the idea that when investments and home values rise, people feel wealthier and tend to spend more. That additional consumer spending flows back into the broader economy. In other words, strong market performance can lead to economic growth and vice versa, but as we’ve discussed, they are different things.