Us Stock Prices and Macroeconomic Fundamentals

Using 54 years of quarterly data and a VAR model underpinned by a theoretical framework describing the relationship between US stock prices and the macroeconomy, this paper analyses the extent to which US stock prices deviate from economy-wide fundamentals. Focusing on real output and using a present value approach, we derive the fundamental price-output ratio and the fundamental stock price under different assumptions regarding the time-variability of returns, and proceed to compare these to actual data. Despite differences between model results, all imply that since 1996, the stock market, relative to other periods in history, has been overvalued compared to its value warranted by the expected growth in output