Earnings growth and the bull market of the 1990s: Is there a case for rational exuberance?

This paper examines whether permanent earnings growth, crucial to stock valuation, increased during the 1990s, as suggested by proponents of the new economy. Using S&P 500 earnings for the period of 1951–2000, we do not find strong evidence of either a one-time structural break or gradual change. However, the confidence interval on permanent earnings growth is wide enough to include an increase that is roughly consistent with the bull market of the late 1990s. Thus, we cannot reject a rational basis for that exuberance.