Can someone explain the significance of this ratio…
never heard of it. perhaps it gives you some sort of valuation metric for the equity market?i’ve come across corporate profits and debt levels as a percentage of GDP but this is new to me.
I think if we analyze the historic trends it might give us a perspective on the relative valuation of the equity markets compared with its historial average. There is a strong correlation between the two since increase in corporate profitablity would imply that the economy is doing well => the GDP is increasing and the market cap should move in tandem. However, if there is a situation where the ratio declines and the GDP is increasing it may imply two things: 1. The maket is anticipating the economy to slow down 2. The equity markets are undervalued.
thanks for your explanation. This ratio is used in the Goldman Sacs Financial Climate Index (GSFCI)… It is there in the study session, Capital Market Expectations