How can we explain the slowdown in economic growth while the stock market is rising?

The economy is not short of contrasts. On February 23, the CAC 40 (Paris Stock Exchange index bringing together 40 of the largest French companies) broke a new record. In the previous days, the major groups announced very satisfactory profits for 2023: Total Energies (19 billion euros), Stellantis (18 billion) or LVMH (15 billion). But five days earlier, the Minister of the Economy, Bruno Le Maire, announced, due to slowing growth, that he would have to find 10 billion euros to balance the state budget. How can we explain this gap between the euphoria of the stock market and the gloom of the real economy? Although it is tempting to believe these communicating vessels, this is not the case: increasing the wealth of a country is one thing, speculating on the stock market is another.

The downward revision of growth forecasts is based on the – anti-cipatory – calculation of France’s gross domestic product (GDP). This indicator is used to establish the economic health of a country by measuring the value of all goods and services produced in a territory during a year. If it increases from one year to the next, the country is growing; if it decreases, it enters into recession. Its calculation is based on tangible statistical data (household consumption, investments, exports, etc.) and its estimate helps establish the state budget for the following year. Because it overestimated French growth for 2024 (1% instead of 1.4% planned) – and therefore its potential tax revenues – the government must now cut back on its spending.

A distorting mirror

In the financial markets, the reality turns out to be very different. The CAC 40 is an expectations market where investors project towards the growth of future profits of listed companies. Buying a share on the stock market involves evaluating the current profitability of the company chosen but above all making a bet of confidence on its future (outlets, innovations, productivity gains). However, large French companies, which are highly internationalized, benefit from stronger growth in other geographic areas: the United States, emerging countries in Latin America or Asia. In 2022, “international activity represented 78.2% of the turnover of CAC 40 companies,” indicates Nicolas Klapisz, of the financial analysis firm Ey.

The Paris Stock Exchange therefore offers a distorting mirror of the French economic fabric. The luxury, energy and health sectors are over-represented. With Hermès, Kering, L’Oréal and of course LVMH, luxury concentrates “more than 30% of the valuation of the CAC 40”, indicates Dylan Le Corronc, editor and partner at Aktionnaire. However, French growth has little impact on this activity. The good health of our flagships reflects the global business climate, not the level of economic vitality in France: “It is not because a French SME is experiencing difficulties that LVMH will sell fewer luxury handbags in China. »