UC Berkeley

What is the link between stock returns and news about economic growth? Using consensus forecasts from the Philadelphia Fed’s Survey of Professional Forecasters, I find that the univariate association between stock returns and gross domestic product (GDP) growth forecast surprises is indistinguishable from zero. Although consistent with prior macro-finance research, this phenomenon is intriguing if one believes that the stock market should move in sync with the economy. I consider two non–mutually exclusive hypotheses for this puzzling phenomenon. The first hypothesis is that GDP growth forecast surprises are correlated with offsetting cash flow news and discount rate news. The second hypothesis is that GDP growth forecast surprises measure news about economic growth with noise. I extract a measure of market-level discount rate news using accounting data and find evidence consistent with the hypothesis of offsetting value-relevant news. Overall, this article makes an important step toward resolving evidence of a disconnect between stock market returns and news about economic growth. More broadly, this article illustrates how accounting constructs and methods can be applied to inform macro-finance questions.