Grantham says higher valuations here to stay

So it depends. Earnings growth is predicated by NI and per share, and it's pretty feasible that as long as you grow your income you can usually grow your ability to service debt.

Interestingly enough revenue in the long term for the s&p 500 is roughly 3%, in line with the GDP growth. But NI has grown at something like 6%, and this is because of margin expansion and financial leverage. And on top of that you get yield increases. So I think it's a pretty easy argument to make that earnings growth will exceed GDP growth in the long term. I can enumerate examples if you'd like. You can use the Schiller numbers to verify this and I think I did this with Bloomberg to look at the Op growth too.

Anyways let's go to the discount rate. WACC = %debt x COD + %equity x COE. COD is a function of treasury bond yields + credit premium, and if you decompose treasury it usually is real growth + inflation. COE = ERPxBeta + RF, which is once again real growth and inflation.

I think it's a really easy argument to make that equity growth will be higher than GDP, and that if discount rates are lower, the value of that incremental growth is higher.

Or another way to look at it is P/E + growth. I'm going to make a simplifying assumption that p/e is earnings yield and that is roughly cash flow, and that's the money given back to you, and then the growth of that is the other part of return.

It's like a bond, if the growth (discount) rate is lower, and you assume the premium stays semi the same, your valuation is going to go up.

So let's put some numbers to that; RF = 3% before, now it's 2% after. Earnings yield historical is 6.4% (1/15.5). So the premium is like ~ 3.4%. Let's say that you keep the premium the same, but now we are in the 2% growth world. Now the earnings yield is 5.4%, so 1/5.4 = 18.5x earnings. Pretty simplified if that makes sense. The growth portion is not really discussed here, but I can go into detail (maybe later) if you'd like.

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