Expected Stock Returns in Bullish Times

When exuberance rules, investors tend to extrapolate the good times and expect high returns. However, if returns remain high or even increase, the growth of earnings or the expansion in the price-earnings ratio required to sustain high returns become increasingly unlikely. Based on a simple decomposition of stock returns, this article discusses the bullish environment at the end of the 1990s, relates it to the environment in the summer of 2025, and draws some relevant conclusions for expected stock returns.