A Macroeconomic Perspective on Stock Market Valuation Ratios

Federal Reserve Bank

Research

29 Pages

Traditional valuation metrics for the U.S. stock market based on a comparison of the aggregate market value of U.S. corporations to measures of dividends, earnings, output, and the replacement cost of measured capital have been above historical norms for the past 25–30 years. This paper says we should not expect traditional stock market valuation metrics other than the free cash flow yield to return to their historical means.

Key Takeaways

Free cash flow held: Free cash flow yield stayed near 3.6% from Q4 1980 to Q2 2022.
Earnings yield fell: Earnings yield dropped from 9.5% to 4.6%, even without assuming lower future returns.
Capital weight shrank: Measured capital fell from 144% to 44% of enterprise value, driving over two thirds of the decline.
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