Sep 18, 2025
The 97% Correlation: S&P 500 and Money Supply Relationship Explained
Research shows a stunning 97-98% correlation between the S&P 500 and the M2 money supply over decades. When dollars increase, stocks follow.
The stock market has a secret partner. It's not earnings or GDP - it's the money supply.
Research shows a stunning 97-98% correlation between the S&P 500 and the M2 money supply over decades. When dollars increase, stocks follow.
The Mathematical Relationship
Here's the basic math: More dollars = higher stock prices.
The correlation works like this:
Money supply grows 6-7% annually on average
S&P 500 rises alongside this growth
The relationship holds across multiple decades
In 2020-2021, M2 money supply exploded 26.9% year-over-year. The highest growth in modern history.
Stock prices jumped in lockstep.
Historical Data Tells the Story
The numbers don't lie:
From 2020-2022: M2 increased over 40%
Total dollars grew from $15 trillion to $21+ trillion
40% of all dollars were created in just two years
Compare this to normal times. Before 2020, M2 had never declined year-over-year. The Fed created an unprecedented flood of new dollars.
Stocks responded predictably - they rose to match the new money.
Why This Relationship Exists
Think of it like supply and demand.
More dollars chasing the same stocks = higher prices. Each new dollar is worth less than before. You need more dollars to buy the same share of Apple or Amazon.
Companies also benefit from inflation:
They raise prices on products
Revenues grow in dollar terms
Earnings increase alongside the money supply
The "E" in P/E ratios grows with monetary expansion. Both price and earnings rise together.
When Correlations Break Down
The correlation predicts bubbles when it fails.
In the late 1990s dot-com boom, stocks ran far ahead of money supply. The market's value relative to M2 tripled its normal level.
Result? The 2000 crash brought stocks back in line.
Other examples:
2018 overshoot led to correction
2021 deviation caused 2022 pullback
When stocks disconnect from money supply, corrections follow.
Current Market Position
Today's market isn't wildly disconnected.
By early 2023, the S&P 500 traded about 13% above the M2 baseline. That's elevated but not extreme.
Compare to true bubbles:
2000 peak: Stock/gold ratio hit 5.0
Today: Stock/gold ratio around 1.8
Long-term average: 1.67
The current ratio sits near 2005 levels - high but not bubble territory.
Investment Strategy
This correlation offers a roadmap for your money.
When money supply grows faster than stocks:
Consider buying more equities
Stocks may "catch up" to the money supply
When stocks run far ahead:
Reduce positions
Prepare for potential corrections
For long-term protection:
Hold hard assets like gold or Bitcoin
These can't be printed by central banks
They maintain value when dollars lose purchasing power
The takeaway? Today's high stock prices aren't pure speculation. They reflect a weaker dollar, not investor madness.
Your cash loses value when the Fed prints money. Stocks and hard assets offer protection from this hidden tax of inflation.
