The Recent Ascent in Stock Prices: How Exuberant Are You?

Stock prices have soared in the last few years, and the debate between those who claim that investors are paying too much and those who believe stocks are worth even more continues unabated. Because stock prices are determined by people’s perceptions of their worth, and these, in turn, are based on their predictions for the future, the possibility that expectations will exceed reality always exists. While we cannot know for certain whether the market is over or undervalued, we can clarify the factors that determine stock prices and discover the assumptions which underly our expectations. Assessing the consistency of our assumptions may keep our exuberance in check.