Home > Market Commentary > Stock Market Overvaluation Explained in One Chart

Stock Market Overvaluation Explained in One Chart

“It is difficult to get a man to understand something, when his salary depends on his not understanding it.” — Upton Sinclair

Market pundits seem to have the most difficult time embracing the concept of overvaluation. This morning on CNBC, Art Hogan once again demonstrated how to dance around the issue when he stated:

“What’s actually happening in the marketplace is, like it or not, the movement in the market mirrors almost exactly the move in earnings growth,” Hogan said. “If you look at how much the markets have gone up on a percentage basis, [earnings and the market are] almost identical or within a percentage point or two of each other.”

The following graph shows that Hogan is correct — the stock market and earnings have indeed grown at a similar rate since March 2009. However . . .


. . . the problem is that stock values since 1982 have increased 1600%, while earnings have grown about 600%.

Hogan focuses on one slice of the data — starting from an artificially-depressed bottom in earnings in March 2009 — and matches up the growth rates in the two series over the last cyclical bull cycle. Over the entire secular bull/bear cycle, however (1982-2013), stock values have appreciated at almost three times the rate of earnings growth.

Hogan tries to cram a secular, multi-decade bull/bear story into one cyclical bull market cycle, with the net effect of conflating the bull/bear/overvaluation debate. Just as he is paid to do.

Bottom line is the market will not correct until the final two indicators flash — when Ed Yardeni and Abby Joseph Cohen are trotted out to revive the “coordinated global boom” meme they pushed all the way up to the 2008 financial crisis — then you’ll know it’s time to run for the exits.

Categories: Market Commentary
  1. September 24, 2014 at 7:26 pm

    I’m not sure exactly why but tbis site is loading incredibly slow for me.

    Is anyone else having this problem or is it a issue on my end?
    I’ll check back later and see iif the problem still exists.

  2. September 26, 2014 at 9:03 am

    Very rapidly thi web site will be fampus among all blog viewers, due to it’s pleasant articles

  3. February 8, 2015 at 3:57 am

    A fascinating discussion is definitely worth comment.
    There’s no doubt that that you need to write more about this subject matter, it may not be a taboo subject but generally folks don’t discuss these topics.
    To the next! Cheers!!

  4. Art
    July 7, 2015 at 7:13 pm

    It is not my first time to pay a quick visit this site, i am browsing this web page dailly and get pleasant
    information from here all the time.

  5. February 17, 2016 at 6:39 am

    Fine Gardening Magazine is one of my favorite gardening magazines.
    Contrary to what some people think, garden sheds made from wood are not a hassle to
    maintain. If you are planning to use the bench as a work space,
    you might want to look at backless benches since they allow you to face in either direction.

  1. No trackbacks yet.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: