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We would expect it under certain circumstances. One explanation could be falling interest rates. Lower rates on bonds incentivize investors to take on more risk

by jcfrei 7y ago

We would expect it under certain circumstances. One explanation could be falling interest rates. Lower rates on bonds incentivize investors to take on more risk (moving more money into equities) in order to still meet their return targets.

H8crilA 7y ago
Or more directly into valuations: govt bond yields are a component of equity discount rates (discount rate = risk free rate + equity risk premium). Of course low bond yields should also mean a slow economy, and thus lower future cash flows. After all the risk free rate is approximately the nominal GDP growth. So I'm not sure how far should this argument go ...
sokoloff 7y ago
Another is share buybacks (which I think are entirely fine). Same amount of profits (DCF + discounted terminal value) spread over fewer shares implies a higher share price.
- jcfrei 7y ago
  I guess this would count as financial engineering though.
- gowld 7y ago
  Not fine if the execs get paid bonuses measured in a certain number future shares.
alexpetralia 7y ago
This is a good point. I agree.