These systemic stock market drops are a natural reaction to significant equity overvaluation. Take a look at the following chart, which compares stock returns to earnings growth since the beginning of 2012. Third, investors do not just react to the current rate of earnings growth, but also to what they anticipate future earnings growth will be. Fourth, since 1926, cumulative stock returns have tracked the cumulative value of the sum of earnings growth and payout yield. Since June of 2012, the cumulative value of stocks has risen faster than the cumulative value of its earnings growth counterpart.

Source: Forbes February 06, 2018 02:48 UTC