Capital Markets: Observations & Insights

What Drives the Stock Market?

• “In the short run, the market is a voting machine, but in the long run, it is a weighing machine” (Ben Graham)

• Market return = EPS growth + dividend yield +/- P/E change

• If the starting P/E is reasonable (i.e. average) then the long-term return should approximately equal earnings growth plus the dividend yield

Source: FactSet, Robert Shiller. The second chart is in log.

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