priceI often hear comments such as…
We should invest in wind and solar energy because the technology will improve and therefore wind and solar energy will become cheaper in the future.
Does the share price for the manufacturer of an object already include expectation of technological advancement? For example, if the market suspects that solar energy will be much cheaper in 5 years time then today’s share price will already be higher?
In a well-functioning market, the current price reflects all known information, insofar as it impacts on the future profitability of a company: in theory, it reflects the net present value of the accumulation of all future earnings.
In your example, the share price for a PV manufacturer may well not include expectation of technological advancement. What’s happened in the PV industry is that there have been many new disruptive entrants into the market - First Solar, and then the Chinese manufacturers - that have brought costs down rapidly. Pre-existing manufacturers generally have been less able to take advantage of the cost reductions from the technological advancement, because the new entrants have brought in new knowhow and new manufacturing processes. Existing players are to a degree saddled with their existing plant and the skills of their current employees.
There are further potential technological advancements in PV and in wind, but there are big questions about whether those will accrue to existing players, or be reaped primarily by new ones. So that potential may well not be reflected in the share prices of existing players.
Most theories of equity pricing hover around valuing stock/equity as discounted value of future earnings. Taking this view into consideration, we may claim that equity markets do discount the value they foresee and their prices do reflect the future gains from technological advancement in as far as the market can see.
Consider your example, if solar energy was to get cheaper implying better demand in the market and higher revenues and profits in future for manufacturers, then investor with long-term appetite would buy hoping to make profit by selling in heydays of the stock thereby bidding up the share price and discounting the future earnings.
While, this approach has its own flaws and share of criticism, I'd suggest going through various available models for equity valuation and employing a suitable model (or a combination) to get appropriate results/insights. Wikipedia article on stock valuation is a good starting point.
The aggregate pricing mechanism of the stock market is quite intractably complex and, often, in age of hedge funds and high-volume algorithmic trading, can be significantly impacted by immediate-to-short term concerns.
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