The U.S. Stock Market Is Overvalued By More Than 50%! Here’s Why

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Key stock indices are becoming significantly overpriced. The value of the U.S. stock market stands at about 133% of GDP. The average for the past 60 years has been around 82%. By this measure, the U.S. stock market is overvalued by more than 50%! Words: 398

So writes Michael Lombardi (www.ProfitConfidential.com) in edited excerpts from his original article* entitled Stock Market Overpriced by 50%?

This article is presented compliments of www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) and www.munKNEE.com (Your Key to Making Money!) and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement

Lombardi goes on to say in further edited excerpts

As the key stock indices approach highs not seen since just before the financial crisis, the underlying fundamentals are screaming “watch out.” The stock market could be edging higher on nothing but false optimism and greed.

The most basic reason for any stock market rally [is] corporate earnings [and] they are declining as the key stock indices inch higher. The bellwether stocks are flashing warning signals.

• The corporate earnings growth rate for S&P 500 companies in the first quarter of this year was forecast at 5.1% in September of 2012. In December, the forecast declined to a corporate earnings growth of 2.4%. Now, according to FactSet, the corporate earnings growth rate for the first quarter of 2013 stands at -0.04%. (Source: FactSet, February 15, 2013.)
• Companies…are showing better corporate earnings by cutting costs and buying back shares, as opposed to increasing revenues. In the fourth quarter of 2012, employee compensation (wages) only accounted for 54.7% of U.S. gross domestic product (GDP)—the lowest level since 1955. (Source: Wall Street Journal, February 11, 2013.)

Key stock indices are becoming significantly overpriced. The value of the U.S. stock market stands at about 133% of GDP. The average for the past 60 years has been around 82%. By this measure, the U.S. stock market is overvalued by more than 50%! [Read: Buffett’s Measure of Stock Market Health, the TMC-to-GNP Ratio, Conveys Concerns]

With all this, the question still remains, where are key stock indices headed next? I’m in the camp that believes that:

• heavy corporate insider selling, [Read: Insider Trading Suggests That a Market Crash Is Coming]
• declining corporate earnings,
• severe economic problems in Europe,
• too much bullishness and [Read: Ignore Wall Street Cheerleaders: Market Technicals, Fundamentals & Other Info Says Otherwise!]
• a slowing economy in the U.S. [Read: What Recovery? Contradictions Between Reality & Political Claims Are Everywhere!]

will limit the upside potential for stocks. In fact, I think a major top is being put in place for the market.

• These Charts Suggest a Possible +/-60% Decline in the S&P 500 by 2014
• 5 Sound Reasons Investors Would Be Better Off On the Sidelines Than In the Market
• Don’t Ignore This Fact: “Greedometer Gauge” Signals S&P 500 Drop to the 500s by July-August, 2013!
• Current Market Overvaluation (from 33% – 51%!) Suggests Cautious Long-term Outlook
• Goldman Sachs’ Leading Indicators Signal Steep Market Crash Ahead
•  Will a Black Swan Event Cause the S&P 500 to Drop by 40%?

Conclusion

While the mainstream focuses on the price-to-earnings (P/E) ratios of companies on the key stock indices, I am more focused on the demand side and the ability of corporate America to earn money in the future. The truth is that the fundamental reasons for this stock market rally are deteriorating daily. Time will certainly tell us more, but remaining cautious seems to be a good option for investors right now.

Editor’s Note: The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.

*http://www.profitconfidential.com/stock-market/stock-market-overpriced-by-50/ (Written by: Michael Lombardi; Copyright © 2012 Lombardi Publishing Corporation)

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