Should an environment of slower economic growth and modest gains in productivity continue in the U.S., what are the investment implications? First, corporate earnings growth is closely linked to real GDP, making performance of domestic companies more vulnerable. Second, because wages typically rise in-line with productivity over the long term, they probably will not pick up as much as the rebound in the labor market would imply without a faster acceleration in productivity (we are already experiencing this phenomenon). Lackluster wage growth means consumer spending, and ultimately earnings for consumer-oriented companies, will also grow at a slower pace. A slower pace of growth should not be construed as a disaster, but it is troubling for the long-term returns of a stock market that is already pricing in the best of all possible worlds.
Source: Bloomberg
Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock. He is a regular contributor to The Blog and you can find more of his posts here.