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Winners and Losers of the Pandemic Economy

While it is true that bullish equity markets are out of step with the historic contraction in the real economy, to say that they are disconnected from it misses the point. In fact, the lofty valuations of companies with high intangible capital per employee make perfect sense in today's economy.

MILAN – Much economic commentary nowadays focuses on “divergence”: while broad equity-market indices are at or near all-time highs, much of the wider economy struggles to recover from one of the most severe downturns ever. Whereas the Russell 2000 is still down 5.4% year to date, the S&P 500 and the Russell 3000 have fully recovered to their pre-pandemic levels, and the Nasdaq, which tilts toward digital and technology companies, is up some 26%. 

Many have concluded that the market is unmoored from economic reality. But, viewed another way, today’s equity markets may be partly reflecting powerful underlying trends amplified by the “pandemic economy.” Equity prices and market indices are measures of value creation for the owners of capital, which is not the same thing as value creation in the economy more broadly, where labor and tangible and intangible capital all play a role.

Moreover, markets reflect the future expected real returns to capital. When it comes to measuring the present value of labor income, there simply is no comparable forward-looking index. In principle, then, if there is a significant anticipated economic rebound, the outlooks for capital and labor income could be similar, but only capital’s expected future would be reflected in the present.

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