"The economy is much more productive, and corporate America is executing much more effectively," he says. "I know these sound like `new era' arguments, and I always had recoiled at that kind of thing. But more and more, we see evidence that this is a unique period in corporate history." If you want to pick a fight on Wall Street these days, try suggesting that the stock market has been lifted to its current heights by an unsustainable speculative bubble. The figures do seem frightening at first glance, even after last week's 1 per cent drop in themarket.

As a group, the stocks in the Standard & Poor's 500 index are trading at a record 28 times the previous 12 months' operating earnings, according to Leuthold Group, a Minneapolis research firm. Stocks would have to fall 44 per cent to return to their median multiple for the past 42 years. Then there's the matter of dividends, which today amount to a paltry 1.2 per cent of stock prices, well below the historic median of 3.4 per cent. The value of the entire US market is a staggering 139 per cent of the nation's annual economic output, more than twice the historic median.

Scared? Well, the bulls -- and there are a lot of them -- have one response: relax. The 1990s are so different, they say, that stocks should be more expensive than usual. They contend there is little reason to expect a catastrophic bear market much more than a 25 per cent drop in prices in the next few years. With a record 25 per cent of household assets invested in the stock market today, it's a good time to scrutinise thebulls' arguments.

Inflation is indisputably bad for stock prices, but it is subdued right now. In fact, inflation is at its lowest level since the 1960s, when stock prices also were sailing along at a relatively high multiple of earnings. Ed Kerschner, head of investment strategy at PaineWebber, calculates that when inflation is 2 per cent, stocks should trade at 25 times earnings; when it's at 8 per cent, he says, the multiple should be only 5.