Buffett’s favorite equity valuation measure shows no value

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We tend to focus most of our stock market valuation models on the relationship between earnings per share (EPS) and price, currently indicating an overvalued market whichever way you slice and dice the numbers. The chart below, courtesy of Bob Bronson (via dshort.com) follows a different tack and shows the stock market’s valuation in comparison to America’s economic activity as measured by GDP, which is largely independent of corporate EPS.

“The stock market will have to decline substantially to bring this important valuation indicator, the ratio of the stock market’s price to GDP – Warren Buffett’s favorite valuation metric, to the extremely low level that indicates an end to the current Supercycle Bear Market Period,” said Bronson. (Bronson’ “Supercycle Bear Market Period” refers to the primary bear market of PE compression that commenced in 1999 and has not yet, according to him, reached secular lows.)

Click on the image below for a larger chart.

Source: dshort.com, April 21, 2010.

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