We show that comovements of individual stock prices cannot be justified by economic fundamentals. This finding is a rejection of the present value model of security valuation. Unlike other tests of this model, ours is robust in that it allows for volatility in ex ante rates of return. The only constraint we impose is that investors' utilities are functions of a single consumption index. This implies that changes in discount rates must be related to changes in macroeconomic variables, and hence stock prices of companies in unrelated lines of business should move together only in response to changes in current or expected future macroeconomic conditions. We also show that this constraint implies that any priced factors in the APT model must be related to macroeconomic variables. Hence our results are also a rejection of the APT, so constrained.
