Why Stock Valuation Hinges More on Returns Than Future Earnings
“This is particularly concentrated at very long horizons,” Myers continued. “It’s not the case that [stocks with high multiples] immediately give you very bad returns. But if you track these companies over a long horizon, you find that their returns are a lot lower than we thought.” The paper analyzed the valuations of all listed U.S. stocks from 1963 to 2020 over 10-year rolling periods. The model in the paper used industry benchmarks and the average P/E multiples of all firms to determine what represents a high multiple.
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