# Are Equities Overvalued?

1 Opinion March 26, 2015 Project-Syndicate ![A. Michael Spence](/sites/default/files/styles/246w/public/assets/images/con_032670.jpg?itok=cxjGfIlv) By A. Michael Spence > In such a complex environment, investors can be expected to reach widely disparate conclusions, which will sustain – if not increase – market volatility.

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.

The S&P’s price-to-earnings (P/E) ratio for the trailing 12 months is close to 20, compared to a long-run mean of 15.53 and a median of 14.57. The Shiller P/E ratio – based on average real (inflation-adjusted) earnings from the last ten years – is at 27.08, with a mean and median of 16.59 and 15.96, respectively. And, in February, the forward 12-month earnings P/E ratio, which uses managers’ future earnings guidance, reached an 11-year high of 17.1, with the five- and ten-year averages standing at about 14 and the 15-year average at 16.

Read full article as published in [Project Syndicate](http://www.project-syndicate.org/commentary/stock-market-equities-overvalued-by-michael-spence-2015-03)

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*A. Michael Spence is the William R. Berkley Professor in Economics & Business.*## More Opinions from A. Michael Spence

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