The Nasdaq index is 97.5% correlated with global liquidity. Liquidity expansion lowers discount rates and risk premiums, particularly impacting longer-duration, higher-valuation technology stocks.
This is why many believe stock prices are overvalued; excessively high valuations no longer reflect actual company performance but rather the amount of money in circulation.
However, stock prices are ultimately determined by future cash flows and the discount rate, with liquidity primarily influencing the latter. While monetary policy significantly alters the stock discount rate, corporate cash flows, earnings realization, and industry networks still contribute to price formation, with earnings ultimately determining whether such valuations are sustainable.
