Now I mention this because after 15 years in banking, teaching financial modeling has forced me to reacquaint myself with some of the basic tenets of markets and valuation. Such things tend to get lost in the midst of “getting the deal done” and chasing paper profits. This reacquaintance process has been quite illuminating for me and I thought perhaps for others too.
A reminder of what the market actually represents is a good place to start. The stock market is simply an asset with some intrinsic value based on an expectation of future free cash flows to equity holders. Those cash flows are generated from revenues less costs of the underlying companies that make up the market. Let’s use the Wilshire 5000 Full Price Cap Index as the proxy market for this discussion as it is the broadest measure of total market cap for US corporations. It’s level actually represents market capital in billions.
So the market has put a valuation on those expected future cash flows to equity holders (as of today) at around $19.7T (a 55% increase from Jan of 2012) down from around $22.5T (a 77% increase from Jan of 2012) at the market peak last summer.
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