S&P 500 Versus Copper: Seven Performance Drivers

  • 20 May 2021
  • By Erik Norland

Copper and the S&P 500® have tracked each other quite closely during the past 16 months, both falling sharply at the outset of the pandemic only to rebound spectacularly. The S&P 500 is up about 30% from pre-pandemic levels while copper has outperformed, rising over 60% (Figure 1).

Figure 1: Copper and U.S. equities have broadly tracked one another since January 2020

While copper and U.S. equities have generally moved together, one could argue that their rallies over the past 13 months were driven by very different factors. “Dr. Copper” is often seen as a proxy for the health of global industry and manufacturing. By contrast, equities are, in theory, a discounting machine, using interest rates to bring future cash flows from businesses such as earnings and dividends into the context of the present. Although equities and copper have tended to correlate positively over the past four decades, and especially so during the past 20 years (Figure 2), they perform very differently in different environments (Figure 3), and the ratio of S&P 500 to copper can vary considerably over time (Figure 4).

Figure 2: Copper and U.S. equities have been positively correlated on a 1Y rolling basis since 1999

Figure 3: Copper and U.S. equities have not always tracked each other closely

Figure 4: S&P 500 can be redenominated out of U.S. dollars and into pounds of copper

  • Copper outperformed equities in the late 1970s amid high inflation and a boom in developing markets, notably Latin America.
  • Equities outperformed copper through the 1980s and 1990s as emerging market countries suffered from a debt crisis, and as disinflation allowed interest rates to fall, sending financial asset prices soaring.
  • Copper outperformed from 2000 to 2011 as China’s rapid industrialization dramatically increased demand for industrial metals at a time when equity markets suffered bear markets in 2000-02 and 2007-09.
  • From 2011 to early 2020, equities outperformed copper as China’s growth moderated and the supply of natural resources outstripped a slowing pace of demand. Simultaneously, corporate profits surged and dividend payments rose by over 150% during the 2010s, boosting equities, which also benefitted from a low-rate environment.
  • Since the pandemic began, demand for home improvement and manufactured products has surged, leading copper to outperform equities, which have also continued to perform well.

Here are some factors to look at that might influence the relative performance of equities versus copper.

  1. Chinese industrial growth: China consumes 40-50% of the world’s copper ore each year, some of which is used domestically in electrical wiring and manufactured goods etc, and some of which is re-exported as components as intermediate and finished products. Over the past 16 years, copper prices have shown a strong positive correlation to both Chinese GDP and especially to the Li Keqiang Index, composed of electricity consumption, rail freight volumes and bank loans (Figures 5 and 6). It has shown extraordinary growth over the past 12 months.

Figure 5: Copper tends to correlate positive with proxies of Chinese industrial demand

Figure 6: Copper shows a stronger correlation to the Li Keqiang Index than overall Chinese GDP

  1. Demand for manufactured goods: China’s strong growth can be attributed in part to it successfully containing COVID-19 domestically and reopening its economy. Additionally, China has also benefitted from a worldwide boom in demand for manufactured goods exemplified by the unpreceded growth in retail sales in the United States (Figure 7). One of the outstanding questions that investors face is: Will demand for manufactured goods in the U.S. and around the world remain high as the services sector reopens? Or will consumers shift their spending away from goods and back to experiences such as holiday travel? Any shift away from manufactured goods might be detrimental to copper.

Figure 7: Surging retail sales have been great for copper prices

  1. Savings rates: Since the pandemic began, savings rates have surged around the world (Figure 8). What households do with their savings and what happens to savings rates could influence both equities and copper. For starters, as the economy begins to reopen, consumers may not need to spend less on manufactured goods in order to finance additional expenditures on experiences. They could simply save less or even draw down existing savings. This could, in the end, prove bullish for copper if consumers don’t really face an either-or choice on how to deploy their capital. By contrast, reduced savings rates could be bearish for equities. Unable to spend money on experiences, many individuals have invested in equities. Increased spending opportunities may decrease the appeal of investing and increase the appeal of consumption.

Figure 8: Consumers may not have to choose between goods & services; they could save less instead.

  1. Quantitative easing (QE) and monetary policy: Part of the reason why copper outperformed equities may have to do with stocks (and precious metals like gold) responding more directly to QE than industrial metals like copper. The U.S. Federal Reserve (Fed) created $3 trillion in three months from March to May 2020. Since then, the central bank has dramatically slowed its asset purchases to $120 billion per month (Figure 9). Other central banks like the Bank of Canada (BoC) and the Bank of England (BoE) have also curtailed QE purchases (Figure 10). This may explain way the equity rally has lagged the rally in copper. While the European Central Bank (ECB) and the Bank of Japan (BoJ) have continued their QE programs at a more rapid pace than the Fed, BoE and BoC, ECB board members have stated that they may begin to curtail their purchases as soon as this summer, while many investors appear to believe that the Fed might announce tapering of QE as soon as this fall. A slower pace of QE might put upward pressure on longer-term bond yields which could, in turn, disadvantage equities relative to industrial metals. This is especially true as the pace of debt issuance now outpaces the Fed’s buying program by a 3-1 margin. Finally, the more robust the economic recovery, the sooner central banks may begin to tighten monetary policy.

Figure 9: The S&P 500 and gold responded more directly to Fed QE than copper

Figure 10: Some central banks have already slowed their asset purchases

  1. Corporate Profits and Dividend Payments: Since 2015, corporate earnings as a percentage of U.S. GDP have been stable at around 10-11%. Although down from their peak levels of nearly 13% in 2012, corporate earnings remain exceptionally high as a percentage of GDP. In past downturns they dipped as low as 6% of GDP and generally began falling significantly before the peak of the equity market: 1997 earnings peak versus 2000 market peak, or 2006 earnings peak versus 2007 market peak (Figure 11). Any drop in corporate profits as a percentage of GDP might not work out well for equity investors but might not be such a bad thing for copper as falling corporate profits might indicate a rising level of household income as the economy expands, potentially boosting demand for manufactured goods. For their part, following on the heels of a 155% rise in dividend payments over the course of the 2010s, S&P 500 Annual Dividend Index Futures currently price little prospect for dividend growth during the 2020s (Figure 12). Poor growth prospects might benefit copper over equities but that may depend on what happens to long-term bond yields. That said, any positive surprise on earnings could be bullish for stocks.

Figure 11: Earnings peaks have often happened before equity peaks

Figure 12: Investors price little in the way of dividend growth for the 2020s

  1. Long-term bond yields: one obvious question is: Why have equities done so well if investors expect essentially zero growth in dividend payments for the 2020s (and, in fact, negative growth after inflation is considered)? The answer seems to boil down to three things, two of which we have already discussed: high savings rates and quantitative easing have created a large pool of capital, a portion of which has been invested in equity markets. The other major risk to equity investors comes from a rise in long-term bond yields (Figure 13). High levels of equity valuation appear to be predicated on the assumption of low long-term bond yields. If 10Y and 30Y bond yields stay low, perhaps the equity market can continue to support high levels of valuation. If bond yields rise, that assumption could be at risk. Factors that might influence the level of bond yields could include the size of U.S. Treasury issuance (debt supply), the pace of Fed buying (one source of debt demand) and inflation expectations. The Fed has announced that it may allow inflation to run above target for some period to make up for it having undershot its inflation target previously. That, and the fact that the Fed has suggested that it isn’t planning to tighten monetary policy pre-emptively based on its inflation forecasts as it has in the past, might alarm bond investors. If so, that could be bearish for bonds and stocks but potentially quite bullish for industrial metals such as copper and aluminum.

Figure 13: Are equity valuations predicated on the assumption of low long-term rates?

  1. Copper supply: Demand isn’t the only reason why copper prices have done well. The supply of copper has stagnated since 2015 and fell in 2020 in the face of higher supply (Figure 14). One risk factor for copper is the potential for high prices to generate a rise in copper supply. A steep rise in mining supply between 2010 and 2015 probably contributed to copper’s 70% decline in value. Will the recent record high copper prices incentivize a boom in copper production? If so, how long will it take for copper mining supply to begin increasing once again? In the past there has often been a lag of as long as seven years between the time mining investments took place and metal production begins to increase. The answer to these questions are likely to influence the price of copper going forward.

Figure 14: Will Surge in Copper Prices Incentivize an Increase in Production?

Bottom Line

  • Copper prices and U.S. equities have tracked each other closely since January 2020
  • Since January 2020, copper has significantly outperformed U.S. stock indices
  • Copper has responded to China’s industrial growth and global manufactured goods demand
  • Equites appear to have been driven by QE programs and high savings rates


All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author(s) and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.

About the Author

Erik Norland is Executive Director and Senior Economist of CME Group. He is responsible for generating economic analysis on global financial markets by identifying emerging trends, evaluating economic factors and forecasting their impact on CME Group and the company’s business strategy, and upon those who trade in its various markets. He is also one of CME Group’s spokespeople on global economic, financial and geopolitical conditions.

View more reports from Erik Norland, Executive Director and Senior Economist of CME Group.

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