US equities are expensive, according to one longstanding measure.
This measure is the ratio of share prices to the net worth of companies – the value of their capital stock and other assets, It’s often called 'Tobin’s q', after the Nobel laureate who described it in 1970. Latest figures from the Federal Reserve estimate this ratio to be over 165 per cent for non-financial firms. That’s twice the average since data began in 1952, and the second-highest level ever – just behind the record reached in early 2000.
Now, Tobin intended this measure to be a theory of capital spending. The idea was that if the value of shares was high relative to a firm’s capital stock it was a signal that investors expected that stock to deliver high profits, which should cause the firm to invest more. And if share prices were low it was a sign that the firm had over-expanded and so should cut back.