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

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  • Richard W. Kopcke
  • Matt Rutledge

Abstract

After the sharp run-up in stock prices during the bull market of the late 1990s and their subsequent collapse in 20012002, 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.

Suggested Citation

  • Richard W. Kopcke & Matt Rutledge, 2004. "Stock prices and the equity premium during the recent bull and bear markets," New England Economic Review, Federal Reserve Bank of Boston, pages 63-85.
    • Handle: RePEc:fip:fedbne:y:2004:p:63-85
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    References listed on IDEAS

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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.
    2. Richard W. Kopcke & Dan Muldoon, 2009. "Why Are Stocks So Risky?," Issues in Brief ib2009-9-23, Center for Retirement Research, revised Nov 2009.

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    Keywords

    Stock - Prices;

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