Final answer:
P/E ratios are impacted by the anticipated constant growth rate (g) for a stock. If the growth rate 'g' is expected to be higher, the P/E ratio typically increases and the stock price is expected to rise due to revised investor expectations about the company's future prospects.
Step-by-step explanation:
The Price/Earnings (P/E) ratios are impacted by the anticipated constant growth rate (g) for a stock. If investors revise their expectations and perceive that 'g' is higher for a stock than it previously was, the P/E ratio is likely to increase, suggesting a higher valuation for the company's earnings. Consequently, the stock price should rise as the market adjusts to the new growth expectations.
The relationship between P/E ratios and stock prices is underpinned by the idea that stock prices are based on expectations about the future. A shift in investor expectations about a company's growth prospects can significantly influence the stock price. If the anticipated growth rate increases, this positive outlook generally leads to a rise in stock price, while downward revisions in growth expectations tend to lead to a decrease in stock price.