Tobin’s equity Q is a warning for US equities

Today’s Flow of Funds report published by the Federal Reserve reveals that the market value of the equity issued by US non-financial companies at the end of the third quarter was 0.91 times the net worth (assets minus liabilities) of those companies at replacement cost. The geometric average of equity Q since 1900 is around 0.65. The US stock market is therefore more than 40% overvalued relative to historical trends based on this yardstick.

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