Richard Smith, learn from this:
Nobel-winning economist Paul Krugman starkly laid out the disconnect between the stock market and the economy in a scathing op-ed
Paul Krugman.
Brendan McDermid/Reuters
The Nobel-winning economist Paul Krugman broke down the broad disconnect between stock markets and the economy in a scathing New York Times op-ed article last week.
In the article, titled "Stocks Are Soaring. So Is Misery," Krugman said investor optimism about Big Tech's profits would not go far, as people can't survive on "rosy projections."
Using Apple's $2 trillion market valuation as an example, he said that as long as investors expect the tech giant to generate profits in the coming years, they "barely care" about the US economy's near-term prospects.
In a New York Times op-ed article on Thursday, the Nobel-winning economist Paul Krugman explained what's driving the "disconnect between rising stocks and growing misery."
"The real economy, as opposed to the financial markets, is still in terrible shape," he wrote in the article, titled "Stocks Are Soaring. So Is Misery."
He said that "the truth is that stock prices have never been closely tied to the state of the economy," adding that they were disconnected from indicators such as jobs and economic output.
Wall Street's fixation on mega-cap tech stocks has pushed the weighting of the S&P 500's 10 biggest components to record highs.
As of July 31, those companies — including Apple, Facebook, Amazon, Microsoft, and Alphabet — made up roughly 29% of the S&P 500, The Wall Street Journal reported, citing data from S&P Dow Jones Indices.
That represented the largest share in data going back 40 years, The Journal said.
Apple holds the greatest weight in the index, roughly 6.5%. Last week, the tech giant became the first US-listed company to hit a $2 trillion market capitalization.
Krugman said that the market values of tech companies had little to do with their profitability or the economy. "Instead," he said, "they're all about investor perceptions of the fairly distant future."
Apple's price-to-earnings ratio stands at about 33, suggesting that only about 3% of the value investors place on the company reflects the money they expect it to generate over the next year, Krugman said.
"The profits people expect Apple to make years from now loom especially large because, after all, where else are they going to put their money?" he wrote. "Yields on U.S. government bonds, for example, are well below the expected rate of inflation."
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He added that "as long as they expect Apple to be profitable years from now, they barely care what will happen to the U.S. economy over the next few quarters."
He said that Americans could retrieve only minimal income from capital gains and could not survive on "rosy projections."
"Unfortunately, ordinary Americans get very little of their income from capital gains, and can't live on rosy projections about their future prospects," he said.
