Skip to main content
Message Font: Serif | Sans-Serif
No. of Recommendations: 0
While lower earnings in the aggregate are associated with rising stock index values, it may well be that the lower interest rates that accompany lower earnings may be what is causing stock prices to go up. Lower interest rates increase the present value of future expected free cash flows and lower interest rates, by stimulating the economy, raise expectations about the magnitude of future free cash flows.

In attempting to isolate the effects of earnings changes on stock market prices, I would look to a period when interest rates didn't change very much. From Sept. 1960 though Nov. 1965 the prime rate of interest was an unchanging 4.5%.

An alternative would be to regress stock market changes on earnings changes and interest rate changes.

Print the post  


What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.