‘Stocks aren’t expensive’
inaccurate, this will bring the price-to- earnings ratio back down towards the longer term average.
Laith Khalaf, of fund shop Hargreaves Lansdown, said: “When earnings are factored in, valuations in the UK market look reasonable – not cheap, nor expensive. That means in the short term, the stock market can turn in either direction without defying the laws of statistics.”
Comparing market value (the total size of a market) with GDP ( gross domestic product) is one of legendary investor Warren Buffett’s favourite metrics.
Russ Mould, of AJ Bell, said while companies can fiddle or embellish their own numbers, they can’t do so to official statistics such as GDP – which measures the value of all goods
and services produced by a country. The ratio of market cap to GDP is now approaching record highs. It currently stands at 113pc, compared to 131pc at the height of the tech bubble, and 114pc in 2007. The average over the past 29 years is 87pc.
“This is fair enough, as the ratio of corporate profits to GDP is also at a record high,” said Mr Mould. But that means corporate profits have to stay where they are to ensure the index maintains its current level, and the ratio of earnings to GDP would have to move higher for the market to rise.
He said over half of the FTSE 100’s forecast earnings come from banks,