The world’s biggest economy is projected to crater this quarter, in what is likely to be the largest contraction since at least the Great Depression. US stocks, meanwhile, have soared. They’ve recouped trillions of dollars of market value in recent weeks, erasing a swoon in March as commerce was forced to shut down around the world.
If forecasts for a 30% to 40% decline in gross domestic product turn out to be accurate, then the US stock market’s valuation is more disjointed from the underlying economy than it’s been since the dot-com bubble in 2000. The Federal Reserve’s Nowcast, a statistical model based on economic indicators, forecasts a 31% contraction in GDP, while economists at JPMorgan estimate the economy could shrink as much as 40%.
The market capitalization of the companies in the S&P 500 Index, a benchmark that tracks 500 large US-listed stocks, is defying gravity. Investors are looking past the economy’s downtown, anticipating a time when growth rekindles. If JPMorgan’s estimates are accurate, the S&P 500 will soon be worth about 25% more than US GDP, assuming the stock market remains close to its value at the end of April 2020. The ratio of stock market capitalization to GDP is sometimes called the Buffett indicator, named after investor Warren Buffett who has used it to analyze whether the stock market is overvalued.