Valuation Declines and Lower Earnings Growth
Global Aging Population: A Growing Concern for the Stock Market
Impact of an Aging Population on Stock Returns
The world’s population is aging rapidly, and while this demographic shift may present opportunities in certain sectors, it poses significant challenges for the stock market, according to a recent analysis by JPMorgan strategists. Historically, an aging population has been linked to declining stock returns, reduced earnings growth, and lower valuations.
Impact of an Aging Population on Stock Returns
The analysis shows a clear correlation between a rising elderly population and a decrease in stock market performance. Over a 10-year period, a 1% increase in the population aged 65 and older is associated with a 0.92% drop in annual stock returns. This trend, the strategists argue, is driven by two key factors: slower economic growth and declining valuations.
As populations age, fewer people remain in the workforce, leading to slower overall economic growth. This reduced workforce can stifle innovation and productivity, which negatively affects corporate earnings. Furthermore, with more people entering retirement, there’s a decrease in investment capital as retirees shift from accumulating savings to drawing from them.
Valuation Declines and Lower Earnings Growth
The shrinking investor base has broader implications for stock market valuations. As retirees pull their funds from the market to support their living expenses, national savings rates decline. In turn, this puts upward pressure on bond yields, making fixed-income investments more attractive than equities. Higher bond yields and reduced investment in stocks drive stock prices down, leading to lower valuations overall.
Companies that rely heavily on domestic markets are particularly vulnerable to these trends. Multinational corporations, however, could face an even greater impact as global aging accelerates. The aging population is expected to grow more rapidly in countries like China, where the share of people over 65 is set to increase by seven percentage points over the next decade. For companies with international operations, global aging could weigh heavily on earnings growth.
Healthcare: A Bright Spot in an Aging World
Despite these challenges, there’s one sector poised to benefit from an aging population: healthcare. As the elderly population grows, so does the demand for healthcare services. The JPMorgan strategists found a strong correlation between aging populations and excess returns in the healthcare sector. Specifically, a 1% increase in the share of the population over 65 is expected to lead to a 0.85% rise in healthcare sector returns over the next 10 years, driven by increased earnings growth in the industry.
Unequal Impact Across Countries
The aging population trend won’t affect all countries equally. While China is expected to see a sharp increase in its elderly population, from 12% to 19% in the next decade, the United States will experience a more moderate rise from 18.1% to 21.5%. This discrepancy suggests that some economies may face greater pressure from aging populations than others.
In the U.S., the aging of the baby boomer generation presents its own set of challenges. As Barclays economist Jonathan Millar noted earlier this year, the U.S. economy may soon reach a point of "peak burden" as a larger share of older adults exert pressure on social systems and financial markets. Additionally, the fact that a significant portion of U.S. stock market assets is owned by individuals over the age of 55 could increase market volatility, as older investors may be more likely to sell off assets during downturns, exacerbating declines.
Conclusion
As the global population continues to age, the stock market faces a challenging road ahead. Reduced workforce growth, lower innovation, and increased selling pressure from retirees could lead to slower earnings growth and declining valuations. However, certain sectors, such as healthcare, may thrive in this environment as demand for medical services rises.
The aging trend will not affect all countries equally, and multinational corporations will need to adjust their strategies to account for this demographic shift. Investors should consider these long-term trends when planning their portfolios, as the implications of an aging population will likely shape market dynamics for years to come.