Recently, the increase in the long-term Treasury yield makes the market worry about potential valuation adjustment in the U.S. stock market. The increase in the treasury yield is mainly driven by the increase in investors inflation expectation.

1. Someone argue that people have higher inflation expectation because they expect the U.S. economy to recover from the COVID-19-driven economic contraction at a faster speed. Do you agree? Explain why.

2. Write down the general formula for discount cashflow valuation of a stock. Why does an increase in inflation expectation increase the discount rate in the DCF valuation?

3. Why does an increase in the discount rate cause a larger decrease in stock price for growth stocks than for value stocks?