The US stock market will not crash.

The easiest way to study the value of the stock market is the price to earnings ratio. The price to earnings ratio shows the price of a stock relative to the profits the company earns. So if one share of stock sells for 15 dollars and the company has one dollar in profit for each share of stock, the P/E would be 15. For the last 80 years, the average P/E for the US stock market has been about 15.

Sometimes a P/E is much higher if the company is growing quickly and investors are anticipating higher profits. Some stocks trade with a low P/E when the company is earning money, but investors fear those earnings will decline. Currently the US stock market is at about an average P/E of 19. This is high historically, but not high enough to anticipate a crash. The US stock market had an average P/E of about 60 before the crash of 1929 and an average P/E of 25 just before the 1987 crash. The Japanese stock market has had an average P/E of over 50 for almost 10 years.

Another measure for stock value is the dividends paid out per share. The US stock market has recently been paying a historically low dividend. The low dividends are cause for concern, but companies do have lots of cash and interest rates are low which may explain the low dividend problem.

Basically stocks are expensive, but not overpriced. There are few bargains, but companies are growing rapidly and are often worth their value. If company’s profit growth slows, stock growth will slow or possibly decline a bit. Also, if interest rates rise, stocks may fall unless companies raise dividend pay-outs. But it is also possible that profits will remain strong and interest rates remain low and stocks will continue to soar.

Basically the stock market may continue its torrid pace, or if conditions change, the rally may end and stocks could languish. The chances however of a stock market crash are slim.

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