UF, no no no... The TOTAL price the market is paying for ALL earnings is the sum of market caps. The total earnings is the sum of profits minus losses. Period. That is the only definition of aggregate PE that stands an unbiased test of logic.
John, this is just bizarre. Aside from the fact that I have no idea why it matters what the "total market" costs (Me, I buy stocks, not markets), you seem to be forgetting the rather important fact of limited liability.
Companies that are losing money absolutely are not worth some positive multiple of their earnings--that would give them a negative net worth, whereas limited liability ensures that a company is worth at least zero.
Let's say that there's some "natural" PE (call it K) that is proper for all profitable companies. (Note: you seem to favor this view; I don't). Let's also say that there are 20 companies, 10 of which are making $2 per year, and 10 of which are losing $1 per year. The value of the 10 profitable firms, in aggregate, will be 20*K. The value of the ten unprofitable firms, in aggregate, will be at least 0. So the total value of the market is at least 20K, and the total profits are $10, so the P/E would be at least 2K, which is twice what the "natural" P/E should be of any firm, even though the market isn't overvalued (the unprofitable firms are all selling at 0!).
I'm not making any statement as to whether or not the market is overvalued, but your assertion that your way of determining the valueof the market is "the only definition of aggregate PE that stands an unbiased test of logic" is odd. |
