Tracking PMI data and forward equity returns

Christian J. Galipeau

Christian J. Galipeau
Senior Market Strategist, 04/28/21

We believe real economic growth is likely to reach levels not seen in the United States since 1983–1984. Our best estimate is for real GDP to approximate 6.5% year-on-year growth in 2021.

Exhibit 1 shows the year-on-year change in real GDP quarterly back to 1970. The red-dotted line represents 6.5% year-on-year change.

We monitor many pieces of high frequency data to gauge where we are in the economic cycle. One of the most frequently cited measures of economic strength/weakness is the Institute for Supply Management’s Manufacturing Purchasing Managers Index. This monthly survey of 300 purchasing managers in the United States is a diffusion index that assesses the current business environment as well as what the purchasing managers expect going forward. Readings greater than 50 have generally been consistent with economic expansions while readings under 50 typically are consistent with economic contractions.

Exhibit 2 shows the ISM Manufacturing PMI data series quarterly back to 1970.

The most recent ISM Manufacturing PMI reading was 64.7 (March 31, 2021), which is the strongest reading since December 30, 1983. That data fits with our real GDP forecast of 6.5% which, if accurate, would be the strongest year-on-year growth since 1983–1984. In our opinion, this indicates the economy is improving.

Forward equity returns using ISM Manufacturing PMI readings

What can history tell us about equity returns in different economic environments? As noted, ISM PMI readings under 50 generally are consistent with a contracting economy while readings over 50 typically indicate expansion. Generally, when the economy is contracting, investors are hesitant to buy risky assets. The “news flow” is scary. Look at the first half of 2020 for proof of that. Conversely, when the economy is expanding, investors are more apt to buy risky assets, including equities and lower-tier credit. In this environment, the “news flow” is more constructive and conducive to risk taking.


We researched forward equity returns using monthly PMI data back to 1950. Further, we measured annualized returns for the S&P 500 Index out 1, 3 and 5 years from monthly peaks and monthly troughs in the data. Exhibit 3 shows median S&P 500 annualized returns out 1, 3, and 5 years from PMI troughs and peaks. Return calculations are ex-post.

From troughs in the ISM Manufacturing PMI data (readings ranged from 29.4 to 41.7), forward S&P 500 returns were as follows:

1-year annualized median return of 21.5%

3-year annualized median return of 11.9%

5-year annualized median return of 9.7%

From peaks in the ISM Manufacturing PMI data (readings ranged from 60.6 – 76.6), forward S&P 500 returns were as follows:

1-year annualized median return of 3.2%

3-year annualized median return of 7.4%

5-year annualized median return of 6.2%


Historically, forward-looking S&P 500 returns have been stronger following troughs in the ISM Manufacturing PMI data relative to forward returns from peaks in the PMI data. As discussed in a previous Active Insights piece (May 29, 2020), troughs in PMI data have on average been good leading indicators of strong forward equity market returns. On the other hand, following peaks in ISM PMI data, forward equity market returns have on average been more muted, albeit positive, particularly in the shorter term.

One-year annualized returns following a trough in the PMI data are more than six times greater than those following a peak in the data. However, that difference narrows to an increase in 55-60% on a 3- and 5-year basis. The bottom-line is, whereas equity market returns have been lower on an annualized basis when comparing forward-looking periods following Manufacturing PMI peaks versus troughs, investors have still benefitted from positive annualized returns.