The stock market's current troubles have raised the question of whether stocks are overvalued. Surprisingly few investors have given serious consideration to this question. If they did, many would not be holding stocks right now.
Stocks are at record highs relative to the earnings of the companies that they represent.
In the parlance of the business press, the average price to earnings ratio is now about 25 to 1. Let's walk through it for a bit. If we assume that this ratio is not going to go any higher, then stock prices have to grow at the same rate as earnings, or net profits. In general, we would expect profits to grow at the same rate as the economy. Of course, shareholders also receive dividends.