I have come to appreciate that the older I get, the less my pop culture references resonate. With that written, I am working off the assumption that everyone reading this knows who Madonna is (and, truth be told, if you don’t, I prefer not knowing). Madonna, as one of the most prolific and successful pop singers of the past forty years, has had a number of huge hits, including 1984’s "Material Girl," in which she sang of living in a material world. Well, we may or may not be living in a material world, but when it comes to the economy and the markets, we think we are living in a nominal world.
Nominal Gross Domestic Product (GDP) is a measure of the value of all final goods and services produced within our country at current market prices during a particular period (usually a calendar quarter or year). Nominal GDP doesn’t distinguish between the volume of goods and services produced and the price of those goods and services, which means when prices are moving sharply higher, nominal GDP is likely moving sharply higher. That dynamic, with inflation in the mid-to-high single digits, is certainly in play today as Q4 nominal GDP increased an estimated 14%. While one can credibly argue that real GDP – which does account and solve for price when measuring output – is a more accurate reflection of an economy’s performance, companies’ financial results are ultimately driven by and reflect price and volume. On that front, we are coming to the end of a Q4 earnings season that has seen S&P 500 revenues increase 15% and EPS increase 31%, on average, year on year. And as we look further out, the Organization for Economic Cooperation and Development expects US nominal GDP to increase 7.6% in 2022 and 4.9% in 2023 (see chart). Our economy – especially on a nominal basis – continues to power ahead.