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Capital Market Expectations
Capital Market Expectations
Medium
An analyst uses the equation Ve = GDP × (Earnings/GDP) × (P/E) to decompose equity market value growth. Over very long horizons (30+ years), which component is most likely to dominate the growth of Ve?
A
Nominal GDP growth, because earnings share and P/E cannot continually increase or decrease
B
Earnings share growth, because corporate profitability trends persistently
C
P/E multiple growth, because equity valuations rise with increasing investor sophistication
D
Equal contributions from all three components
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Tags
#equity-decomposition
#pe-ratio
#earnings-share
#nominal-gdp
#mean-reversion
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