Financial Institutions in the Stock Markets

Running Head: Financial Institutions in the Stock Markets

Financial Institutions in the Stock Markets: Market Capitalization, EPS Growth, and Investor Expectations Influence on Stock Prices

Introduction Wild gyrations, extreme peaks and valleys, and fear and mania; this has been the epitome of the stock markets not just historically but over the last decade. Ten years ago, the NASDAQ was at an all time high exceeding 5,000 in March of 2000, the DOW was exceeding 11,000 and the general state of the economy was very favorable. Internet companies were being spawned by the hundreds and many of them turned once struggling entrepreneurs into instant millionaires. Internet IPO’s were the hottest thing since sliced bread and many thought there was no end to the rise of the new technology companies. Alas, right after the NASDAQ peaked in March 2000, a precipitous drop occurred and the markets plummeted. Just a year prior, the NASDAAQ returned nearly 90%, but one year later it plummeted 40% and continued dropping. The bear market of 2000-2002 erased all gains of the NASDAQ that to this day hasn’t even recovered half of its gains. The mood of investors and the American public quickly went from great to grim. The American and even global economy is strongly tied to the performance of our public companies. These public companies make up trillions of dollars in annual revenue. In fact, in the total market cap in 2008 of all publicly traded US companies was over $16 trillion compared to the $13 trillion of GDP. It is clear that publicly traded US companies drive the global economy (GDP vs. Market Cap from The Daily Reckoning). In this essay I will examine the role that publicly traded US companies play in the stock markets and how their capitalization, EPS growth, and investor expectations influence the prices