Population growth plays a significant role in economic power which drives stock market returns.
A larger population translates to a bigger labor force, which is essential for producing goods and services, driving innovation, and supporting industries. Additionally, a higher population means more consumers, which fuels domestic demand and economic growth. This relationship is particularly evident in GDP, as it is fundamentally tied to the size of a country’s labor force and productivity.
Population Growth and GDP
Population growth contributes to GDP growth in two main ways:
- Labor Force Expansion: A growing population increases the number of workers, enhancing a country’s productive capacity.
- Consumer Demand: A larger, often younger population stimulates demand for housing, goods, and services, creating a virtuous economic cycle.
When population growth slows or declines, as seen in many countries around the world, especially in aging nations like Japan, economic growth stagnates, unless it’s more than offset by substantial productivity gains which is extremely difficult to do.
Population and Stock Market Performance
Population growth also influences stock market performance.
How?
- Strong population growth fuels a robust labor and consumer market
- Strong labor and consumer market drives strong corporate revenue growth
- Strong corporate revenue growth drives strong corporate earnings
- Strong corporate earnings supports strong P/E ratios
- Strong P/E ratios drive healthy stock market returns
Countries like the U.S., with steady population growth and high productivity, have experienced strong GDP growth and therefore stock market success, reinforcing the importance of demographics in economic power.
Many other countries haven’t fared nearly as well, Germany, Italy, Japan, and Poland just to name a few. Their populations have generally stagnated over the last 30 years, and in the case of Japan and Poland have actually shrunk. Not surprisingly their markets haven’t performed nearly as well as the United States. The United States population has grown nearly 3x that of the European Union.
Which is a contributing factor to the U.S. stock market outperforming the E.U. by over 3.5x over the last 10 years.
A larger, growing population supports corporate revenues through robust consumption and workforce-driven production. Over time, this contributes to stronger earnings growth for companies, which is a key driver of stock market valuations.
Is population growth the only factor that drives economic growth and stock market returns?
No, of course not, but it’s an important driver. There are other factors, but don’t underestimate the power of population growth.
-Paul R. Rossi, CFA