How US money supply affects the stock market
The US bull market continues to gain momentum, as evidenced by the fact that the S&P 500 index has risen by more than 20%. Such trends indicate that the money supply is growing, which analysts say points to impending changes in the stock market.
However, the growth does not affect all market participants. According to the latest data, only a few large companies account for a significant portion of the S&P 500’s gains:
– three companies account for more than 20% of the index: Apple, Microsoft and Nvidia;
– the ten largest stocks account for around 35% of the index’s total value, a level of concentration not seen since the 1960s.
Current trends show that large companies are growing faster than the rest of the market. At the same time, the market as a whole remains volatile. Experts predict that the growth of large-cap companies will slow down over time. This could pave the way for smaller players.
The growing money supply in the US could negatively impact business and investment decisions. The availability of cheap capital helps companies grow rapidly. However, with limited funds, companies cannot fully achieve their goals. At the same time, this situation can be advantageous for large companies, as they will face less competition.
Market challenges
Khuram Chaudhry of J.P. Morgan points to the interdependence between the dynamics of the money supply and the stock market. According to him, money growth accelerates the development of smaller companies. This leads to a decrease in their market concentration. Since the beginning of 2024, the money supply has started to grow actively after a period of decline. Factors that have influenced this growth include:
1. The Fed set the target interest rate at 0% in 2020.
2. The government provided households with funds to stimulate the economy, known as the M2 money supply.
3. M2 includes cash, deposit accounts, money market accounts and certificates of deposit.
4. The money supply grew in 2020 and 2021, but then the pace slowed due to lower interest rates.
5. Inflation has eaten into household incomes.
6. The Fed tightened policy, and M2 growth slowed significantly.
Even after the interest rate hike, money supply growth continued to decline. However, since the second quarter of 2024, the situation has stabilised. M2 has started to grow again, with an increase of 2 per cent in August. Although the figures are still below the peaks of 2022, the market is showing high liquidity.
Analysts expect such trends to continue in the future, helped by lower interest rates.
