$11 trillion loss in stock market value
Corporate earnings have been growing and the drop in value is the result of P/E contraction—the result of rapidly rising interest rates.
All US publicly traded stocks, as represented by the Wilshire5000, a market-capitalization-weighted index, has fallen in value by $11 trillion or 22% from its peak of $48.9 trillion in late 2021 (chart). This Index is a market capitalization-weighted index composed of more than 6,700 publicly traded companies that are headquartered in the United States.
The current value, as of the close on October 27, is $38 trillion. The Fed has popped this asset bubble, which was inflated by excessive monetary easing and fiscal spending during the last two years.
The government inflated the bubble and is therefore responsible for the 40-year high in inflation and negative growth in real wages.
Based on the most recent study of the wealth effect; for every dollar of asset value deflation, consumers expenditures fall by about three cents. Since consumer expenditures account for 68% of GDP, a reasonable assumption is that the GDP will be reduced by about $350 billion or roughly 1%. A negative wealth effect.
Corporate earnings have been growing during this period and the drop in value is the result of a contraction in the P/E ratio—the result of rapidly rising interest rates. There is an inverse relationship between the cost of equity (ke) and P/E ratios. The higher the discount rate, the lower the price paid for a dollar of earnings.
Based on a historical ratio of the market cap of the [stock] market to GDP, the market is still overvalued. As of today, the Total Market Index is about 154% of the last reported GDP.
The next big shoe to drop is the real estate market. If preliminary estimates are correct, values could fall by more than 20% over the next year or two. This too will reduce consumer expenditures, GDP, and job growth.