Key Takeaways
- The relationship between the M2 money supply and the S&P 500 has decoupled recently, with equities rallying despite monetary aggregates contracting from their 2022 peak. This challenges the simple thesis that liquidity alone is driving the market.
- Corporate earnings, particularly within a narrow cohort of technology-centric firms, have become the primary engine of the index’s performance, supplanting the influence of broad money supply growth.
- Reaching an S&P 500 target of 6,800 appears contingent on continued earnings momentum and resilient valuations, rather than a fresh infusion of central bank-led liquidity.
- While valuations are elevated, they are not in unprecedented territory when viewed against earnings growth expectations, suggesting the market’s path depends more on operational performance than macroeconomic liquidity flows.
The notion of the S&P 500 reaching a lofty target like 6,800 often invites a familiar line of reasoning centred on monetary aggregates. For decades, a rising M2 money supply has been a reliable tailwind for asset prices. Yet, a closer inspection of the current market reveals a significant divergence from this historical precedent; equities are forging new highs even as the M2 supply has moderately contracted from its peak in 2022. This suggests the market’s current trajectory is underpinned by a different, more concentrated force: extraordinary corporate earnings growth.
The Fading Echo of M2
Historically, the correlation between the S&P 500 and the US M2 money supply was a cornerstone of macro analysis. The logic was simple: a greater volume of money circulating in the financial system would inevitably find its way into financial assets, pushing up prices. The post 2008 era of quantitative easing, and particularly the immense fiscal and monetary stimulus of 2020-2021, appeared to cement this relationship. As M2 ballooned, so did the S&P 500.
However, since early 2022, this link has frayed. The Federal Reserve’s quantitative tightening programme has led to a reduction in the M2 stock from its peak, yet the S&P 500, after a challenging 2022, has embarked on a powerful new bull run. This development does not necessarily invalidate the importance of liquidity, but it does suggest its role has become more nuanced. The vast pool of liquidity created during the pandemic has not vanished; rather, it appears to have settled within the system, its influence now secondary to more specific microeconomic factors.
A Tale of Two Drivers: M2 vs. Earnings Per Share
To understand the current market, it is more instructive to compare the index’s performance not just against M2, but against its own forward earnings per share (EPS) estimates. When viewed through this lens, the recent rally appears far more rational. The engine is not necessarily new money entering the system, but the formidable profitability of the index’s largest constituents.
| Period | M2 Money Supply Change | S&P 500 Forward EPS Growth | S&P 500 Performance |
|---|---|---|---|
| Q2 2020 – Q4 2021 | Significant Expansion | Strong Rebound | Strongly Positive |
| Q1 2022 – Q4 2022 | Peaked & Began Decline | Moderated/Fell | Negative |
| Q1 2023 – Present | Modest Contraction | Accelerated Sharply | Strongly Positive |
As the table illustrates, the S&P 500’s performance has recently shown a stronger allegiance to its earnings trajectory than to the direction of M2. The market dip in 2022 coincided with a period of falling earnings estimates, and the subsequent recovery has been powered by a robust upward revision cycle, especially within the technology sector.
Valuation in an Era of Concentration
A target of 6,800 for the S&P 500 from current levels would imply further multiple expansion, a cause for concern given that forward price to earnings ratios are already sitting comfortably above their long term averages. As of mid 2024, the index’s forward 12 month P/E ratio was hovering around 21, compared to a 10 year average of approximately 19.
The risk, of course, is concentration. The market’s fate is disproportionately tied to the performance of a handful of mega cap companies. Any faltering in their specific growth narratives, whether through competitive pressures, regulatory hurdles, or a simple deceleration in earnings momentum, would have an outsized impact on the entire index, regardless of broader monetary conditions.
The Narrow Path Forward
Achieving a level of 6,800 is therefore less about predicting the Federal Reserve’s next move on its balance sheet and more about underwriting the earnings resilience of Big Tech. The path requires a continuation of the status quo: sustained earnings beats from key index members, stable long term interest rates, and the absence of a significant exogenous shock that could derail investor sentiment.
The primary risks to this outlook are twofold. Firstly, persistent inflation could force the Federal Reserve into a more restrictive stance than anticipated, putting pressure on valuations. Secondly, the very source of the market’s strength—its concentration—is also its greatest vulnerability. A rotation away from the current market leaders could trigger a broad-based correction even if the wider economy remains stable.
In conclusion, while models linking the S&P 500 to the money supply provide a useful long term perspective, they are insufficient for navigating the present environment. The market’s ascent is now a story of corporate execution, not just central bank liquidity. A speculative hypothesis for the future is that the next major market influence may come not from M2, but from M&A. Should the largest firms begin to use their immense cash reserves and elevated stock prices for significant acquisitions, it could inject a new, powerful dynamic into the market, potentially providing the impetus needed to reach, and even surpass, such ambitious targets.
References
Voronoiapp. (2024, July 4). *S&P 500 vs. U.S. Money Supply M2 (1970-2024/05)*. Retrieved from https://www.voronoiapp.com/markets/-SP-500-vs-US-Money-Supply-M2-1970202405-1689
Seeking Alpha. (2021, September 22). *Money Supply: A Good Predictor For S&P 500 Index?* Retrieved from https://seekingalpha.com/article/4455999-money-supply-a-good-predictor-for-s-and-p-500-index
Federal Reserve Bank of St. Louis. (2024). *M2 (M2SL) and S&P 500 (SP500)* [Data set]. FRED, Federal Reserve Bank of St. Louis. Retrieved from https://fred.stlouisfed.org/graph/?g=JpB4
Forbes. (2025, July 2). *Bull Vs. Bear: S&P 500 Market Outlook For The Rest Of 2025*. Retrieved from https://forbes.com/sites/garthfriesen/2025/07/02/bull-vs-bear-sp-500-market-outlook-for-the-rest-of-2025
AInvest. (2025, July 2). *U.S. M2 Money Supply Hits Record $21.94 Trillion*. Retrieved from https://www.ainvest.com/news/m2-money-supply-hits-record-21-94-trillion-4-5-yearly-growth-2507/
ETF Trends. (2025, June). *S&P 500, Dow, Nasdaq Since 2000 Highs June 2025*. Retrieved from https://etftrends.com/etf-education-channel/sp-500-dow-nasdaq-since-2000-highs-june-2025
FinFluentialx. (2024, September 24). [Post regarding S&P 500 target]. Retrieved from https://x.com/FinFluentialx/status/1840481984830955996
FinFluentialx. (2024, September 24). [Post regarding S&P 500 valuation]. Retrieved from https://x.com/FinFluentialx/status/1840844151933317359
FinFluentialx. (2024, September 26). [Post regarding market drivers]. Retrieved from https://x.com/FinFluentialx/status/1842837250909880396
