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#168 Is the US Stock Market 45% Overpriced?


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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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[1]  http://www.GuruFocus.com

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