By Antonia Oprita, Deputy News Editor, CNBC.com NEW YORK ( CNBC) - U.S. stocks are overpriced by 50% but corporate buying is keeping them up, at least until there is a decline in the U.S. fiscal deficit, Andrew Smithers, the author of the book "Valuing Wall Street: Protecting Wealth in Turbulent Markets" wrote in a recent research note. Other analysts, such as Goldman Sachs' Jim O'Neill, said they were optimistic about the prospects for stock markets as the world economy was on the mend due to good data on the U.S. economy. "U.S. equities are around 50% overpriced but, absent unexpected shocks, are being kept up by corporate buying. This should continue until corporate cash flow falls, which is likely to coincide with a decline in the fiscal deficit," Smithers wrote in his research.
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Smithers said that fiscal deficits must be exactly matched by cash surpluses in other sectors and that the business sector, which has habitually run a cash deficit that averaged 1% of gross domestic product between 1960 and 1990, is currently running a surplus of 3.1% of GDP. As there has been a high negative correlation between fiscal balances and the cash flow of the business sector, "this supports the probability that a reduction of the deficit will be accompanied by a deterioration in business cash flow - and a large reduction in the deficit by a large deterioration in corporate cash flow," he wrote. "We don't know when, or even if, the fiscal deficit will start to be reined in, but it looks unlikely to be postponed beyond 2013. At any rate, the stock market has every reason to be nervous as the November election gets nearer," Smithers added. --Written by Antonia Oprita at CNBC.