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Strategies & Market Trends : The Stock Market Bubble

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To: Box-By-The-Riviera™ who wrote (2238)	10/30/1998 10:09:00 PM
From: Moominoid	Read Replies (3) of 3339

Stock prices only look reasonable value if we will get the outrageous increases in profits that the analysts are still predicting for 99 and thereafter. There is no reason why GDP growth of 3% this late in the cycle will make those numbers turn out to be right. Let's assume profits grow at 5% nominal forever more (3% real +2 inflation) and free-cash flow=earnings and the equity premium is the historic 6.5% and the risk-free rate is 5%. Then P/E = 1/(rf+ep-g) = 1/(.05+.065-.05) = c. 15 What's the P/E currently? 27, 25? This points to the 5000-6000 range. Please adjust my assumptions in line with reality :) David

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