Is the levitating stock market overvalued and ready to go down? Or is it being fundamentally revalued and poised to rise further? This much is certain: The number of corporations announcing surprisingly high quarterly earnings is remarkable. Wall Street Cassandras forecasting low economic growth and weak profits for the fourth quarter were wrong--again--while bullheaded investors who poured a record $200 billion into equity mutual funds in 1996 look pretty smart. Corporate earnings have been the bedrock for the spectacular 55% rise in equity prices over the past two years, and while the growth rate of earnings is down from its lofty heights, it still shows startling vim and vigor. That's the good news.

The bad news is that the market is tiering--indeed, all major stock markets around the world are splitting into two groupings. A brand-new Global Nifty Fifty is revealing itself in New York, Tokyo, London, Frankfurt, and elsewhere, composed of very big multinational corporations that can leverage the global economy. These multinationals have the technology, scale, and products to take advantage of the post-cold-war tripling of the size of world capitalism. For some time now, their earnings and share prices have outperformed most small- and mid-cap stocks in Asia, Europe, and the U.S. They are providing a foundation for ever upward large-stock price indexes, such as the Standard & Poor's 500-stock index, while the small-cap Russell 2000 falls behind. Based on early returns, fourth-quarter earnings for U.S. companies in the S&P 500 appear to be flirting with double-digit gains, and there is no sign of the slowdown that has been so widely predicted. In Japan, strong multinational corporate earnings are allowing the Toyotas and Sonys to escape the death grip of a sinking Nikkei.

All this means that the individual investor should not be rushing pell-mell into stocks. It is critical for investors to penetrate the veil of broad stock categorizations to differentiate equities. Funds are not always what they appear to be. As the latest BUSINESS WEEK guide to mutual funds shows, one fund that calls itself a "growth fund" owns stocks with a median capitalization of $37 billion. Another "growth fund" holds stocks with a median cap of $524 million. Even though the two funds identify themselves in the same way, they clearly don't invest the same way. One invests in giant multinationals, one doesn't. They don't carry the same risk, and they don't offer the same returns.

Homework isn't only for schoolchildren. To take advantage of what is happening in the bull markets of the 1990s, boomers had better put in the time as well as their dime.

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