Warren Buffett warns that the current cap ratio of U.S. stock market capitalization to real GDP seems to be much higher than the long-run average benchmark. With the current cap ratio of 146.4x, U.S. stock market capitalization represents at least 146 times American national income per year. This current cap ratio exceeds the long-run average benchmark of 80x by more than 80%, and is historically second to the peak of irrational exuberance near 148.5x during the dotcom bubble back in March 2000. From 2018Q3 to 2019Q2, the S&P 500 delivers a 12-month net profit of about $135 per share, and the S&P 500 aggregate share price rises to $3000+ per share. The equivalent S&P 500 P/E ratio thus hovers in the broad range of 22x to 24x. This narrow range well exceeds the long-run average benchmark of 15x to 16x. Long-term stock market capitalization and corporate profitability should move in tandem. If these key metrics stray too far apart, it can be prohibitively expensive for U.S. public corporations to get back to balance.

From this fundamental perspective, the normal stock market forces may pull equity valuation back to the long-run average yardsticks relative to U.S. national income and corporate profitability.