Aggregate stock prices, relative to virtually any indicator of fundamental value, soared to unprecedented levels in the 1990s. Even today, after the market declines since 2000, they remain well above historical norms. Why? We consider one particular explanation: a fall in macroeconomic risk, or the volatility of the aggregate economy. Empirically, we find a strong correlation between low-frequency movements in macroeconomic volatility and low-frequency movements in the stock market. To model this phenomenon, we estimate a two-state regime switching model for the volatilityandmeanofconsumptiongrowth,andfindevidenceofashifttosubstantially lower consumption volatility at the beginning of the 1990s. We then use these estimates from postwar data to calibrate a rational asset pricing model with regime switches in both the mean and standard deviation of consumption growth. Plausible parameterizations of the model are found to account for a significant portion of the run-up in asset valuation ratios observed in the late 1990s. (JEL G12) It is difficult to imagine a single issue capable of eliciting near unanimous agreement among the many opposing cadres of economic thought. Yet if those who study financial markets are in accord on any one point, it is this: the close of the 20th century marked the culmination of the greatest surge in equity values ever recorded in U.S. history. Aggregate stock prices, relative to virtually any indicator of fundamental value,