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Warranted Stock Market Valuations and the Price-Earnings Equation Once Again

Posted on May 21, 2008

It can be shown http://delong.typepad.com/sdj/2007/05/a_teaching_note.html that the right way to value the stock market is with the price-earnings equation: P = E/[r - (1/ - 1) ]Where E are the earnings--the sustainable permanent cyclically-adjusted, and correctly accounted for Haig-Simons earnings--paid on the index, r is the appropriate real rate at which to discount cash flows of the riskiness of the stock market, is the payout ratio of dividends to earnings, and is the wedge (which may be posititive or negative) between the appropriate external real interest rate r and the inter...

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bonds , discount rate , interest rates