December 04, 2022

Different combinations of changes in the discount rate and earnings growth lead to different changes in equities and bonds’ absolute and relative valuation. It also provides an explanation as to how changes in the two drivers, the discount rate, and the earnings growth, impact the absolute and relative valuation of the two asset classes and vice versa. In short, we are able to explain not only the changes in valuation but are also able to outline the conditions under which bonds and equites valuation changes both rise, both decline or one rises in value while the other declines. In order to anticipate the possible outcomes, we need to first develop a framework and then identify the policies that lead to rising or declining earnings growth and rising or falling discount rates. Once this is accomplished one may be able to anticipate the changes in the different assets’ absolute and relative valuation by keeping tabs on the changes in the policy mix.

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