Abstract
The Equity (return) Premium is shown to emerge fully, specifically and episodically from just three transient factors: EPS growth above long term GDP/capita growth; after tax long bond yield below GDP/capita growth, and change in P/E (valuation) - without a risk premium. The earnings/price (E/P) ratio is shown to lack an embedded premium and appears anchored to GDP per capita growth. An aggregate stock market after-tax return model is proposed that balances return with GDP growth; which existing models do not. Long term investors (IRA, 401k, endowments, buy and hold strategies and pension plans) have no historical negative return risk over their investment-divestment horizon, enjoy the lowest effective tax rate, are the largest equity holder block with common economic attributes, and may therefore determine valuation by being the highest sustainable bidders.
Published Version
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