Imagine living in a country where your actions control the globe. You export what’s good and bad to the entire world. You make money, everyone makes money. You lose it, capital across the globe shrinks. You make products, they are seen on every shelf across the world. Your stock market crashes, the next day stock markets all over the world start crumbling like house of cards. Buy why? What distinguishes the US from the rest of the world. Let’s explore what’s so special about the US stock market.
What is the Market Cap of the U.S. Stock Market?
So, what is market capitalization, anyway?
Imagine a listed company on U.S stock exchange. It has 1M$ shares each costing 100$. What is the market cap of a company? 1M * 100 = $100M. Now let’s take every company listed on the stock exchange and add their individual market cap. There you go and you have the market cap of the US. And trust me this figure will blow your mind. It’s $55 trillion as of Sept 2024. Yes Trillion. Not million, not billion. Trillion. That’s enough to make even the richest person on earth feel like a peasant.
Why is the Market Cap So High?
So, what makes the US such a ruling market leader? Let’s explore.
1. US dollar dominance: Almost every intercountry transaction happens in US dollars. The rate of US dollar controls which economies will thrive. From oil to gold to food everything is linked to the dollar. Many countries have pegged their currency to the US dollar for stability. In other words, dollar price movement affects the world drastically.
2. The US is independent: Trust me British colonialism had paralyzing effects on countries stunting their growth and productivity. The US for most of its history was a free country. The US gained independence in 1776 vs Hong Kong in 1997.
3. Astounding innovation: The US has no shortage of innovation. Almost every technical advancement is born in the US. The US had a great education system and nurtured encouragement for efficiency and productivity. Almost every tech company you hear about is probably from the US. Apple, Microsoft, Google, NVIDIA. The US’s Silicon Valley is still by far the biggest tech arena.
4. Diversification: The US has innovation not only in tech but all over the space. Its infrastructure, healthcare and banking is as profitable.
5. Consumer Strength: American consumers have a natural insatiable appetite for goods and services. The consumer demand picks up and so is the supply. Economies thrive on consumer spending.
6. Investor confidence: The US is seen as the safest market. If you can’t make big money in the US probably you will not make anywhere. The US stock market absorbs shock and bounce back in no time. Investors see the US as a reliable and comforting space and hence attracts money from all over the world.
7. Global Influence: The US has successfully exported its products to the world. From Big Mac to Coke to Starbucks. These are household names now and can be seen in every country. People do enjoy these products without the thought of it being American.
How U.S. compares with rest of the world
The total market cap of the global stock market is about $115 trillion. The U.S. market alone is doing heavy weightlifting contributing around 40% of the world total market cap. This is humungous. In the near future if any other country or union wants to catch up, it will have to drastically boost their economy to be even a worthy competitor of the US. So, who are the major players except the US.
China: China is catching up fast by leveraging low-cost manufacturing and increase in exports. It stands around $10T. Long way to go. China has pegged yuan to greenback (a term used for US paper dollars) and the Chinese government restricts yuan from appreciating to keep the demand high.
Japan: Japan known for its 0 inflation and 0 interest rates has seen a spike in both now. Japan has a highly developed manufacturing and Service economy and is the largest producer of electronic items and motor vehicles. Its economy stands strong at around $7T.
India: Another developing nation after China is India with $5.5T as market cap. India is working on improving its manufacturing, service sector, real estate and infrastructure projects to boost its economy. According to the World bank, it is currently the highest developing economy.
Market Cap to GDP
Taking a look at only the market cap is a slightly biased indicator of growth. Warren Buffet has suggested another indicator known as Buffet Indicator and it talks about “Market Cap to GDP Ratio”.
Buffett Indicator = Total US Stock Market Value/Gross Domestic Product (GDP)
While there are many variations to this formula as a general rule a market is said to be
Overvalued: When the ratio is more than 100%.
Undervalued: When the ratio is less than 50%.
Fairly valued: When the ratio is around 75%.
However other patterns emerge as shown in the below table.
| Ratio = Total Market Cap / GDP | Valuation |
|---|---|
| Ratio ≤ 83% | Significantly Undervalued |
| 83% < Ratio ≤ 107% | Modestly Undervalued |
| 107% < Ratio ≤ 131% | Fair Valued |
| 131% < Ratio ≤ 155% | Modestly Overvalued |
| Ratio > 155% | Significantly Overvalued |
By this calculation, the US market is highly overvalued.
Buffet Indicator= $57.50T/$28.42T= 202%
Buffet indicator is not the only measure of the US stock market and has several criticisms as well.
Interest rate: When the interest rates are high, it’s difficult for corporations to borrow money and increase profits. Hence the stock prices stay low. Also, the Bonds pay well and money flows to Bonds from the stock market. When the interest rates are low and bonds do not attract consumers, money flows into the stock market which is what happened after Covid.
International Sales: Another critique for buffet Indicator is that it takes GDP into account but not GNP. ( Gross National product). Ex. It does not take into account what amazon is earning while its sales in India, which is one of the larger markets. But the popularity of Amazon is definitely factored into the Amazon stock price but the sales not in GDP.
Shocks to the stock market
Stock markets all over the world have suffered shocks from time to time and recovered. The US Stock market in recent decades has absorbed the dotcom bubble, 2008 financial crisis and 2020 Covid and 2022 Covid decline and many more.
S&P 500
S&P 500 Index is an A grade index in the stock market world and features 500 biggest and best companies in the U.S/ As of 2024 the market cap of S&P 500 is $37T. The S&P 500 has a great mix of companies from all the sectors.
1. Technology: All the tech giants like Apple, Microsoft, Google, NVIDIA.
2. Healthcare: Companies like Johnson & Johnson and Pfizer.
3. Financials: Big banks like JPMorgan Chase and Bank of America.
4. Consumer Discretionary: Amazon and Tesla.
5. Industrials: Boeing and Caterpillar build the bridges both literally and figuratively.
The S&P 500 is an economic Indicator of US growth. It’s a diversified Index with exposure to a range of industries. It’s an investment benchmark against which the mutual fund returns are measured.
Conclusion
The US market cap is not just about numbers but it’s a reflection of innovation, resilience, global impact and influence. These numbers tell the story that the US is here to stay and thrive. If you are curious about the financial world around you and where to invest, take a look at the US stock market.
FAQ:
1. What are the indices of the US?
Answer: The US has 3 main indices.
Dow Jones industrial averages (DJIA)
It tracks the top 30 prominent companies listed in the United States stock market.
S&P 500
As the name suggests, it tracks the top 500 companies listed in the United States stock market.
Nasdaq composite
It includes almost all the companies listed on the US stock exchange along with Dow Jones Industrial Average and S&P 500.
2. How many companies are listed on the US stock exchange?
Answer: New York Stock Exchange (NYSE) has approximately 2300 companies listed while NASDAQ around 3500.
3. How the US markets are performing?
Answer: Though according to few indicators like the Buffet Indicator market looks overvalued, investor enthusiasm seems to be high and markets are not in the Euphoria stage. Investing in overvalued markets meaning, volatility in short term and potential low returns in the future. However, if one has not at all invested anytime is a good time.
