Where is the true value in the US share market?

Overvalued? Undervalued? Trading sideways? Bull? Bear? No one really knows what’s happening in the equities market. We need a better way.

The numbers can get overwhelming if you look only at the trend lines and the equities values.

For example, the total value of the US stock market has grown by 6.8% per year since the peak in March 2000, outpacing the 4.5% annual growth in the economy during the same period. Today, the US stock market is worth about $60 trillion, which is about 205% of the US economy’s size (GDP) — a higher ratio than at any previous market peak.

Those are the conservative numbers, by the way. Other analysts will generate different numbers wildly higher or lower than the above. But this is a decent starting point.

But hang on, how can the US stock market be valued at 2x the size of the US GDP? That makes no sense. Where’s all the extra value coming from?

One explanation is that US companies have always generated about 35-40% of their revenues internationally. The world is the American market, in other words. Selling to other countries is a great way to boost profits when the home market is going through a dip. But that still doesn’t account for all the extra value. It must be coming from somewhere else.

It’s worth noting that in 2019, the amount of what the central banks call “M2 money” (all the money either in circulation or can be quickly turned into cash) was at about $US15.3 trillion. That amount had gradually increased over the previous 100 years, with only a few periods of major influxes of new money. Everything was under control.

Then Covid hit.

Governments worldwide took the pandemic as an opportunity to print enormous amounts of money, purportedly to ensure their economies could survive the unknown (it was unclear how long the panic of Covid would last). For its part, the US Federal Reserve increased its M2 money supply to $19.1 trillion in 2020. But that was only the beginning.

By September 2024, the US M2 money supply had hit a whopping $21.2 trillion.

To put this figure into perspective, it means about 39% of all US dollars in existence today were printed since 2020 — only five years ago. Surely, all this extra money is influencing the share market? Indeed, it’s impossible for this new money not to warp the value of equities.

To see this warping, remember that money is not the same thing as capital. Money is just a medium of exchange. Capital is the collective noun we give to our producing assets, both tangible and intangible.

You need money to buy and sell a producing asset. However, the amount of money it costs to buy an asset does not need to reflect value. In fact, the monetary cost of an asset can be entirely decoupled from its true value. That’s why the price of equities on the stock market today probably has very little to do with the cash that has gone into those companies.

EverEdge is not in the business of predicting stock market movements or prognosticating about the wheretos and wherefores of equities. We examine the mechanics of a business to find the value underpinning its current and future performance.

Those are the company’s intangible assets — all the hidden and important pieces of the puzzle, including relationships, confidential information, industry expertise, design, approvals and certifications, plant varieties, content, invention, brand, software, network effect and data.

Most intangible assets are either ignored by accountants or their value is misunderstood. Calculating a company’s worth is easier if it focuses on revenue, debt levels, profit margin and earnings. At least those can all be linked to “real” numbers of cold, hard cash. That’s what helps accountants sleep at night.

But as we’ve seen, the sheer amount of new money washing around the US (and global) system today makes all those traditional accounting metrics extremely suspect. A company’s value can’t be measured by its revenue or earnings if it has never been easier to get money.

Said differently, while the total amount of capital (producing assets) has probably risen since 2019, the amount of money has also increased by several orders of magnitude.

We need a different way to measure a company’s value, and that metric must be its intangible assets and the potential of those assets to deliver long-term value.

Put it another way. If you like one of the businesses on the stock market, you should be asking: Could this superstar company with incredible results survive without all the extra money in the system? Does its true value align with its share price?

We suspect many of the NYSE’s highest performers would not pass this test. So, invest with caution.