Today, however, the situation in Sweden does not resemble what happened in the second half of the 1980s. Asset prices have certainly risen strongly in recent years but credit has not grown to the same extent. It seems that, at least to date in the present upswing, Swedish banks and their customers have taken a different line on the provision of credit and borrowing. Everyone is hopefully more accustomed to a deregulated credit market than was the case in the late 1980s. Still, it is important to be alert to the future path of asset prices and credit aggregates, as well as to the underlying forces at work in the Swedish economy. Real assets prices and total lending 270  1,6  240 1,4 210 180  1,2  150 1,0 120 0,8  90 1970  1975  1980  1985  1990  1995  Ass et p rice in d ex: 1980= 10 0 (left scale) L en d in g in p e r c en t o f G D P (rig h t s cale) S ource : R iksbanke n  capital in an economy is dependent on the level of output and how this income is shared between labour and the owners of capital.
From this it follows that corporate earnings and consequently share prices should also be more stable. Another factor that may point to less marked cyclical fluctuations in the future is the transition from manufacturing to the production of services, together with the era of information technology. Thus, if the yield from share investment is more stable in the future than it has been in the past, this might warrant some downward adjustment of the expected return and thereby lead to a higher valuation. Another argument is that with more and more people saving in shares for retirement, the investment horizon has been lengthened. This category of share investor is less concerned about short-run fluctuations in share prices and that might justify a somewhat lower expected return. A third argument is that financial market developments have resulted in decreased transaction costs and less liquidity risk. There may be some truth in arguments of this type but it is still difficult to believe that the expected return has fallen as much as would be needed to justify today’s stock market valuations. Or is higher earnings growth foreseen? Let us now look at the importance of earnings growth for share valuations. We noted earlier that to justify a P/E ratio between 30 and 35, given an unchanged expected return, real earnings growth must move up from 2.5% to 4.5%. Is it reasonable to suppose that the future earnings trend will be as high as that?