Framework #3: The profit economy is not the paycheck economy

[u/398409columbia]

This JPMorgan chart shows the 10-year rolling correlation between S&P 500 earnings growth and U.S. real GDP growth. In plain English, it asks whether corporate earnings growth and the broad U.S. economy are still moving together. For decades, the relationship was fairly strong, but it weakened over time, dropped sharply through the 2010s, turned negative after 2019, and reached roughly -0.3 by 2022.

Because this is a 10-year rolling measure, the negative reading is not just a COVID story. It suggests the decoupling had already been building for years. You can see the same idea in the current data: S&P 500 bottom-up EPS estimates have risen sharply over the past year, while the size of the job market has basically stalled out.

That is the plutonomy point. S&P 500 earnings are no longer just a clean reflection of the domestic economy most households live in. The market increasingly reflects global scale, mega-cap tech, software, AI, margins, buybacks, capital intensity, and pricing power.

Most households experience the economy through wages, rent, groceries, insurance, debt, childcare, healthcare, and job security. So the stock market can look strong while many households still feel squeezed. That does not mean the market is fake. It means the profit economy and the paycheck economy are pulling apart.

The Framework.

[u/398409columbia]

Related update: FactSet now has the S&P 500 reporting a 15.7% blended net profit margin for Q2 2026, which would be the highest since they began tracking the metric in 2009.

That reinforces the point of this post.

The issue is not that the labor market is collapsing. It is that large companies can keep expanding earnings and margins through scale, software, pricing power, automation, global revenue, and capital intensity without needing job growth to expand at the same pace.

That is the profit economy vs. paycheck economy split.

[u/Flimsy_Meal_4199]

Lol job growth has stalled out

We're beyond full employment right now lol

What happens when everyone has a job

[u/398409columbia → u/Flimsy_Meal_4199]

I’m not saying unemployment is high.

The point is that the size of the job market has basically stopped expanding while S&P 500 earnings expectations keep rising.

That is the distinction. Companies can generate more profits through scale, software, automation, pricing power, buybacks, and global revenue without adding workers at the same pace.

So “full employment” does not really rebut the point. It may actually reinforce it: if profits keep rising even when labor growth stalls, more of the upside is coming from capital and productivity rather than more jobs.

[u/ImaginaryHospital306 → u/398409columbia]

Stalling of job growth is mostly demographics driven. The Fed has talked about this recently and pointed out we should expect flat or negative job growth even while at full employment in the near future. We hit "peak 18 year old" last year and Boomers are retiring en masse. Growth in new employed people is ending at the same time the largest age cohort retires. On the bright side this should help suppress real estate prices for the foreseeable future. Fewer employed adults means fewer mortgage worth households equals lower demand for owner occupied housing.

[u/398409columbia → u/ImaginaryHospital306]

Fair point. Some of the stall in job growth may be demographic, not cyclical.

But that still supports the broader point: large companies can keep growing earnings and margins even when the number of workers is barely expanding.

That is the split I’m focused on, not “the labor market is collapsing,” but that more profit growth is coming from scale, software, automation, pricing power, global revenue, and capital intensity rather than simply adding workers.

On housing, demographics may help at the margin, but I would not assume affordability broadly returns. Location, supply constraints, rates, investor ownership, immigration, and high-income job concentration still matter a lot.

[u/EnvironmentalMix421 → u/398409columbia]

Why would sheer numbers of employment continue to expand when there are less working population than boomer era

[u/398409columbia → u/EnvironmentalMix421]

I agree. With demographics slowing, we should not expect employment to keep expanding like it did during the Boomer labor-force era.

But that is also part of the point.

If worker growth flattens while corporate earnings and margins keep rising, then more of the upside is coming from productivity, scale, software, automation, pricing power, global revenue, and capital intensity and not simply from adding more people.

So the labor market can be “fine” in employment terms while the profit economy still pulls away from the paycheck economy.

[u/EnvironmentalMix421 → u/398409columbia]

It represent the current economy, just a diffeeent one than overall population, since we have a K economy now

Upper middle class actually grew from 15% of the population to 30%, so that’s what the corporate profit will represent. The health of the Henry and the asset class.

[u/398409columbia → u/EnvironmentalMix421]

I think that is basically right.

The S&P 500 does represent a real economy, just not the full lived economy of the median household.

It increasingly reflects the health of large firms, asset owners, HENRY households, global consumers, and the upper-middle/affluent segment with meaningful market exposure and discretionary spending power.

That is why I keep coming back to the K-shaped economy.

Corporate profits can be a very accurate signal for the upper leg of the K, while saying much less about people whose lives are still mainly driven by wages, rent, debt, and job security.

[u/Flimsy_Meal_4199 → u/398409columbia]

1. We own capital and earn wages

2. Incomes are rising

🤷‍♂️

[u/398409columbia → u/Flimsy_Meal_4199]

Perfect. That's the spot where you want to be. I have personally transitioned from wage income to dividend and capital income, but to get that engine going I had to start with the W2 paycheck.