Subject 2. Why does Potential Growth Matter to Investors? PDF Download
The long-term growth in earnings for a country cannot exceed the growth rate of potential GDP.
The stock price percentage change is the sum of percentage change in GDP, the share of earnings in GDP and the P/E ratio. In the long run the growth rate of GDP should dominate. The other two factors contribute more to the volatility of the market than to its return. Therefore, the drivers of potential GDP are ultimately the drivers of stock market price performance.
For fixed income investors the growth rate of potential GDP is also very important. It can be used to estimate inflationary pressures, real interest rates, and credit quality of fixed-income securities, etc.
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