Department of Finance, University of National and World Economy, Sofia
The main objective of this study is to discuss the forces driving today’s US stock market levels, in an attempt of assessing their reasonability. This is not the first research of this kind of the author, but the approach now is a little bit different. Some important issues are raised regarding the different types of players on the stock market and their potential influence on its dynamics. The S&P 500 PE ratios are analyzed in historic plan and subsequently used for deriving the implied capitalization rate and cost of equity for different sub-periods. The results indicate for atypically high current PE ratios, and unreasonably low cost of equity. One of the conclusions is that to a great extent this is caused by the policy of low interest rates and quantitative easing, and is an important factor driving high price levels in the short run. It is not logical to accept this as a normal cost of equity level, meaning that it could not be sustainable in the long run. The implication for valuation of stocks is that fundamental analysts and investors would better avoid the temptation of using the current cost of equity as it is not representative for the purpose of fundamental models.