U.S. stocks are overpriced by 50 percent but corporate buying is keeping them up, at least until there is a decline in the U.S. fiscal deficit, Andrew Smithers, the author of the book "Valuing Wall Street: Protecting Wealth in Turbulent Markets" wrote in a recent research note.
Other analysts, such as Goldman Sachs' Jim O'Neill , said they were optimistic about the prospects for stock markets as the world economy was on the mend due to good data on the U.S. economy.
"U.S. equities are around 50 percent overpriced but, absent unexpected shocks, are being kept up by corporate buying. This should continue until corporate cash flow falls, which is likely to coincide with a decline in the fiscal deficit," Smithers wrote in his research.
Smithers, whose book was published in 2000 when stock markets were peaking, uses the "q" ratio between the value of companies according to the stock market and their net worth measured at replacement cost to measure the value of the stock market. The "q" ratio was developed by Nobel Laureate James Tobin.
Replacement cost represents the amount it would cost to replace assets at current prices.
For his valuation of the market, Smithers also uses the cyclically-averaged price-earnings ratio (CAPE) and gets the data for both ratios from the "Flow of Funds Accounts of the United States Z1," a quarterly publication of the Federal Reserve.Page 1 of 3 | Next Page