On the one hand, firms pay dividends to their shareholders, and when there is good economic news investors may expect these payments to increase. Other things equal, this would tend to raise stock prices. In other words, promises of future payments sell at a discount. Good economic news tends to increase the rate at which investors discount future payments, so holding expected dividends constant, it would tend to depress stock prices. The net effect on stock prices depends on the relative strength of these two forces.
Stock prices rise if the dividend effect is greater, and they fall if the discount effect dominates.
If the yield on this claim were higher than the rate at which savers discounted the future, there would be an excess demand for this security, and this would bid up its price and reduce its yield. Hence market forces tend to equalize nominal discount rates and risk-free interest rates. Treasury bills are nominally riskless, and their yields tend to rise in response to strong economic news. This means that expected nominal discount rates also tend to rise in response to this news. The discount effect is illustrated in its purest form by the reaction of prices on long-term Treasury bonds to news about strong economic growth.