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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.
Conclusion:
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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