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#168 Is the US Stock Market 45% Overpriced?

The Price/Earnings ratio of shares influences the value of US stocks. This determines whether investments could be overpriced or underpriced.
We have collected a series of data from 1970 through 2019 for market capitalization[1], GDP and expected profitability:

Starting from 1970 the Market Cap to GDP ratio continued to be under 100%. The expected profitability was also running at a rate of 10% or better.

In recent history the Market Cap to GDP ratio always exceeded 100% while the expected profitability became negative.

Such disparity can be seen in the differences in the 1970-2019 growth rates. The Market Cap grew much faster at +3721% as compared with the growth of the GDP of only +1946%.

The December 2019 Market Cap exceeded the GDP by $10 Trillion. Since a GDP reflects the earning capacity of the US economy, an estimate of market overpricing can be calculated as a percent share of the GNP, which is $22 Trillion. The overpricing of the stock market is then +45%. In case the US debt may have to be discounted, the suggested overpricing may be too optimistic.

The high valuation of the Market Cap to the GDP ratio reflects an optimistic view of the worth of the US shares. At present, such views show at least a 45% overpricing of shares.


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