Are U.S. Stocks Overvalued?

The U.S. equity market is one of the best performing market among developed countries so far this year. For example, the S&P 500 is up by 14.35% on price return basis and 15.37% on total return basis year-to-date. Financials have skyrocketed with the sector in the index up by over 20%. Healthcare and Consumer Discretionary sectors also have had a great with a return of 20% or closer to that. Telecoms and Utilities, usually considered as income plays for their slow and steady growth with high dividend payouts, are lagging the overall performance of the market.

According to a report by Peter Buchanan of CIBC World Markets, U.S. stocks are not yet overvalued at least based on one measure. He states that the the ratio of stock market capitalization to GDP is still lower relative to two earlier highs. This ratio shows the percentage of GDP that represents stock market value. It can be used to identify if a market is overvalued or undervalued. Any figure over 100% is considered as U.S. market being overvalued and a figure of around 50% is said to show that the market is undervalued.

Source: Seeking Alpha

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