ARE STOCKS OVERVALUED

By most standards, the price of equities in the United States has rise n remarkably rapidly during the last 15 years. Since 1994 alone, the S tandard & Poor's index of 500 stock prices has doubled. Although the r apid growth of corporations' profits has propelled the price of their stock, shareholders also are willing to pay a greater price per dollar of their companies' profits, and the valuation of corporations' earni ngs is now nearly as high as it has been since World War II. For the m oment, the value of equity may rest on the growth of earnings, but in the longer run the price of stocks depends on the return that corporat ions earn on their investments, the growth of their opportunities for making new investments without sacrificing their return, and the retur n that shareholders require of their stocks. This article compares the recent price of stocks to traditional standards for valuing equities, finding not only that prices are high by almost all measures but, als o that the appreciation of equity has been exceptionally dependable. T he author uses a simple model to compare the recent data for returns a nd grow th with the value of-equity, concluding that companies' recent performance does not support fully the current price of stocks, Altho ugh the current values of corporations' assets and earnings in financi al markets exceed those that prevailed in the 1960s, the rate oi: retu rn earned by corporations is only three-quarters as great as it was in the 1960s. The author concludes that a lower shareholders' discount r ate, perhaps fostered by the consistently high growth of profits durin g much of the 1990s, could explain the prevailing value of equities.