Are Equities Overvalued?
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Since the global economic crisis, sharp divergences in economic performance have contributed to considerable stock-market volatility. Now, equity prices are reaching relatively high levels by conventional measures – and investors are starting to get nervous.
The question is whether stock valuations are excessive relative to future earnings potential. The answer depends on two key variables: the discount rate and future earnings growth. A lower discount rate and/or a higher rate of expected earnings growth would justify higher equity valuations.