Organic Investments

 

WILL RATE CUTS MAKE A DIFFERENCE TO THE ECONOMY AND THE STOCK MARKET

When it comes to what a company’s stock is priced at in the market, it all comes down to two things: what that company earns and the level of interest rates. For this reason, company stock prices are a reflection of the estimated future earnings and cash flows generated by the company, discounted back to the present at current interest rates (typically the interest rate on a long-dated government bond plus a risk premium). As interest rates decline, future cash flows become more valuable today because of the lower discount rate. Other things being equal, lower interest rates move stock prices higher. As “price” is the numerator of a common valuation metric known as the price-to earnings rat

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