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Stock prices and the equity premium during the recent bull and bear markets

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  • Richard W. Kopcke
  • Matthew S. Rutledge
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    Abstract

    After the sharp run-up in stock prices during the bull market of the late 1990s and their subsequent collapse in 2001–2002, the prices of equities as measured by the S&P 500 are once again uncommonly high relative to companies’ current and prospective earnings, causing some to question whether they are too high relative to the underlying value of the companies they represent. ; This paper compares the recent performance of the equities constituting the S&P 500 with their performance since the 1940s and then extends the familiar Gordon model of equity pricing to examine the contributions of the factors that are likely to influence stock prices in the future. The authors conclude that current valuations do not necessarily indicate a bubble: Rapidly growing earnings and high returns on capital, consistent with a return to full employment, could justify prevailing prices.

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    Bibliographic Info

    Article provided by Federal Reserve Bank of Boston in its journal New England Economic Review.

    Volume (Year): (2004)
    Issue (Month): ()
    Pages: 63-85

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    Handle: RePEc:fip:fedbne:y:2004:p:63-85

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    Keywords: Stock - Prices;

    References

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    1. Richard W. Kopcke, 2000. "Has the stock market become too narrow?," New England Economic Review, Federal Reserve Bank of Boston, issue Nov, pages 31-43.
    2. Roger G. Ibbotson & Peng Chen, 2003. "Long-Run Stock Returns: Participating in the Real Economy," Yale School of Management Working Papers ysm354, Yale School of Management.
    3. Francis A. Longstaff & Sanjay Mithal & Eric Neis, 2004. "Corporate Yield Spreads: Default Risk or Liquidity? New Evidence from the Credit-Default Swap Market," NBER Working Papers 10418, National Bureau of Economic Research, Inc.
    4. Angelo Ranaldo & Rainer Häberle, 2008. "Wolf in Sheep's Clothing: The Active Investment Strategies behind Index Performance," European Financial Management, European Financial Management Association, vol. 14(1), pages 55-81.
    5. Philippe Jorion & William N. Goetzmann, 1999. "Global Stock Markets in the Twentieth Century," Journal of Finance, American Finance Association, vol. 54(3), pages 953-980, 06.
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    Cited by:
    1. Richard W. Kopcke, 2005. "The taxation of equity, dividends, and stock prices," Public Policy Discussion Paper 05-1, Federal Reserve Bank of Boston.

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