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Decoding Equity Market Reactions to Macroeconomic News

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Abstract

The equity market’s reaction to macroeconomic news is consistent with the propagation of news into the real economy. We embody all the macro news in an activity news index and a price news index that together explain 34% of the quarterly stock price returns variation. When those indexes capture a stream of favorable macroeconomic surprises, publicly traded firms experience increases in revenues, profitability, financing, and investment activities. The firm-level resultslead up to an expansion of the real side of the whole U.S. economy. Our findings, taken together, show that stock prices’ reactions to macro news have a strong association with firm-level and economy-wide growth.

Suggested Citation

  • Michele Modugno & Berardino Palazzo, 2025. "Decoding Equity Market Reactions to Macroeconomic News," Finance and Economics Discussion Series 2025-007, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2025-07
    DOI: 10.17016/FEDS.2025.007
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    Cited by:

    1. Lukas Hack & Davud Rostam-Afschar, 2025. "Which Macroeconomic News Matters for Price-Setting?," CESifo Working Paper Series 12215, CESifo.

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    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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