Economic concept

Equity risk premium

The extra expected return investors require for holding risky shares rather than safer assets.

Why can stock valuations rise while company profits do not?

Current profit is only one input into valuation. Prices can rise if investors expect stronger future cash flows, accept a lower risk premium or discount those cash flows at lower interest rates. The resulting multiple expansion can persist, but it cannot deliver rising prices forever without later cash-flow growth or ever-lower required returns.