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1 How is raising money in US stock markets more difficult than in the rest of the world Even if productivity growth has risen in order to justify the higher dividend growth assumptions necessary to justify the current valuation of the US equity market one has to assume that for some reason return on equity can remain sustainably so high On Wall Street it is indeed fashionable to point to the current high ROE as the explanation for the level of the stock market - this after all is what underlies the fashionable Economic Value Added approach to market valuation For example in arguing that the SP500 was modestly undervalued by about 8 per cent comparing to the rest of the world the Goldman Sachs US Strategy team Einhorn et al 1998 assumed that the spread between a companys return on capital ROC hereafter and its weighted average cost of capital WACC hereafter would be equal to its 1998 level approximately 44 per cent in perpetuity This assumption is especially remarkable given that the ROC-WACC spread is on their own numbers currently at a record high for the admittedly short sample of 1986-03 Note that the average value of the ROC-WACC spread over the 1986-03 period is about 16 per cent It is striking that one has to assume that the ROC-WACC spread has to average more than 2 12 times its 1986-98 historical average in perpetuity in order to justify current equity market valuations in the US However the presumption that the ROC-WACC spread or the ROE can be sustainably high in the US is at variance with both theory and history Standard considerations of product market competition suggest that any super-normal profits must ultimately be competed away A strange aspect of the new paradigm view is that we are supposed to believe simultaneously that the competitive forces unleashed by globalisation induce higher productivity growth and greater wage flexibility explicitly but implicitly that
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