LONDON: Despite the deepest economic downturn since the Great Depression, the S&P 500 index is up 6.5 per cent this year.
At an interest rate of 5 per cent, you need $20 million to earn $1 million a year, while at an interest rate of 1 per cent you need $100 million. One worrying message of high stock prices, therefore, is that markets expect low growth and low interest rates for the foreseeable future. If investors place a higher value on these companies’ profits, however, it suggests they do not expect increased investment and competition to erode them. In other words, they see a company enjoying monopoly profits and expect them to continue.
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