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BFI Bullion
February 7, 2020

Y? Series - Why Are Stocks Considered Expensive?

A variety of ratios and indicators can be pointed to in order to make that statement: “Stocks are expensive.” However, in the end, you need to remember that you always need a reference point to measure the value of something.

Frequently, the price to earnings ratio (PE) is consulted. Considering the fact that the sum of stock valuations in the market reflect the sum of an economy’s production, to some degree, the following chart is one worth consulting from time to time.

Source: Haver Analytics, Goldman Sachs Global Investment Research. As of Dec. 31, 2019

The chart shows that taking the total market cap of the US stock market and comparing it to the US Gross Domestic Product, the measure of total economic production, stocks are now more expensive than they were at the peak of the bubble.

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