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Global liquidity and the stock market

Liquidity doesn’t change what companies earn, but it changes what investors are willing to pay for those earnings. That’s why many investors watch it alongside earnings and rates.

How liquidity reaches stocks

When central banks add reserves and credit is easy, yields on safe assets fall and investors move into riskier ones, which pushes valuations (price to earnings ratios) up. When liquidity is drained, the reverse happens: valuations compress even if earnings hold up. Growth and technology stocks, whose value rests on profits further in the future, tend to be the most sensitive.

What the record shows

In 2020 and 2021, record central bank balance sheet growth went with a strong rally in equities, led by technology. In 2022, rate hikes and the start of quantitative tightening went with a bear market: the Nasdaq 100 fell about a third over the year. Liquidity recovered from late 2022, and so did stocks.

Limits

Earnings, interest rates and the economy still matter more over long periods.
The link works best for broad, liquid markets and for direction rather than timing.
It’s a past relationship, not a forecast.

Compare them yourself

Pro puts the Global Liquidity Index next to the Nasdaq 100, with a lead/lag slider and the correlation over any range. The free index is US$194.85 trillion (week to 2 November 2026), up 5.1% on a year earlier; Fed Net Liquidity is US$5.73 trillion.

Questions

Does more liquidity always mean higher stock prices?

No. It tends to support valuations, but earnings, rates and recessions can outweigh it, and the timing is loose.

Which liquidity measure do stock investors watch?

Many watch Fed Net Liquidity (the Fed balance sheet minus the Treasury General Account and reverse repos) for the US, and global liquidity measures for the wider picture.

Follow it every week. The Global Liquidity Index is free. Pro adds 112 charts behind it, a weekly note on what’s driving it and an email when its momentum turns. Free for 10 days.

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General information only, not financial advice. Data can be delayed, revised or wrong. Sources and credits.