Starting in the late 1990s, Warren Buffett remarked that equities can only keep appreciating at 20% a year while GDP grows at 3% annually for so long. Intuitively, it makes sense.

In reality, however, there is zero correlation between stock price movements and economic growth, according to Vanguard’s chief economist Joe Davis, who spoke with reporters at last week’s Inside ETFs conference in Hollywood, Fla. Certainly, the performance of U.S. equities since the Great Recession ended would support Davis’s case.

From May 2009 through January 2020, the S&P 500 climbed at a 15.1% annualized rate. In contrast, U.S. GDP averaged only about 2% in the last decade. There has not been a single year of 3% growth in the last 122 years.

A big chunk of this remarkable performance gap can be traced to a single fact—financial assets and stocks in particular were amazingly cheap in 2009. Throw in the sad reality that slow growth has provided corporate America with fewer investment opportunities and it shouldn’t be surprising that CEOs opted to focus on dividends and buybacks.

Then there is the fact that most of the companies that become public are larger and more diversified than the average America business. It follows that the public company subset is stronger than the entire universe of enterprises.

But in Davis’s view, there is another factor in play. “It’s the price [investors] are willing to pay for growth,” he said. “Valuations are like gravity. You can suspend them for a time.”

As Davis sees it, there are two big risks facing U.S. investors. The first is that things turn out to be worse than expected. The second is that equities are in a position similar to where they were in 1997—expensive but headed towards bubble territory.

Like many, Vanguard expects global growth to slow in 2020, but Davis doesn’t see a recession in America or most major economies. “Recession was the headfake last year,” he said. “Reflation is the headfake this year.”

After a decade in which U.S. equities have trounced their foreign counterparts, Davis believes that the outlook for global stocks is brighter than it is for American shares.

What would it take for U.S. stocks to post another decade like the last one. “Higher interest rates are necessary for higher returns,” he said.

And that would require an extended "period of adjustment."