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Do low yields justify high stock prices? No. Yes. It depends.
MANY INVESTORS ASSERT THAT LOW BOND YIELDS RESULT IN HIGHER STOCK PRICES. In isolation, this clearly makes sense: as the discount rate falls in the denominator, the net present value of the stock increases. However, we also need to consider other dimensions, such as credit risk, and how these also play a role in setting price-to-earnings (P/E) ratios.
Here, I explore the underlying data at the index level (the MSCI USA Index, 1975 to present) to weigh the three possible answers to this question: no, yes and it depends.
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