Firms' high ROE does not justify a re-rating of US equities

US nonfarm, nonfinancial companies have enjoyed a rapid increase in their return on equity (ROE). This does not, however, imply that the stock market is attractively valued. For one thing, the absolute level of firms’ ROE is likely to fall. For another, firms’ real ROE cannot – in theory at least – remain indefinitely above the real discount rate investors use to value future earnings, even if the Fed holds down long-term nominal “risk-free” interest rates.