We decomposed the market-level P/E into a no-growth component, which depends only on future discount rates, and a growth component, the present value of growth opportunities.
We decomposed the market-level P/E into a no-growth component, which depends only
on future discount rates, and a growth component, the present value of growth
opportunities. In valuing both components, we allowed for time-varying risk-free
rates, predictable cash flows, stochastic payout ratios, and changing discount
rates. Growth opportunities account for approximately 95 percent of the
variation and 80 percent of the level of historical P/Es.