We continue to expect below average, but positive, economic growth in the second half of 2009 extending into 2010. Yet we expect a powerful 20-25% year-over-year rebound in profi ts beginning in the fourth quarter. How can it be that a small rebound in GDP can result in a big rebound in earnings per share (EPS) for S&P 500 companies?

Unfortunately, investors often misunderstand the relationship between GDP and the stock market. There is no statistical relationship between the performance of stocks and GDP growth in a quarter. The correlation—or degree to which two things move together—between GDP and the S&P 500 index is zero. Don’t believe me? See for yourself. As you can see in Chart 1, there is no discernable pattern. Notably, over the past 31 years if GDP was negative the stock market was up or down during that quarter exactly 50% of the time.

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