Equity Valuation: Concepts and Basic Tools Discussion

Task 1:

Find an article or a video related to this topic (Equity Valuation and Analysis) and then summarise it in one paragraph

Task 2:

Write a paragraph as a replay to a classmate post discuss their post for the same topic ( The student post is in attach )

Student post:
The article “What PE Will the U.S. Stock Market Support?” the author describes how
different variables affect the famous P/E ratio and why this ratio may be an unreliable gauge
for predicting economic strength or weakness. The model created to analyze the P/E included
ten independent variables: Inflation, t-Bond yield, T-bill yield, dividend yield (S&P 500),
D/E, money supply, Fed P/E index, earnings growth, trailing volatility, Trailing returns (S&P
500) and GDP quarterly growth. Each variable was used in past studies to analyze the
predictability of the P/E ratio.
Using multiple regressions and statistical modeling, the study was able to generate an rsquare of 83.0. In other words, the variables included in the study were able to explain 83%
of the P/E ratio’s value. However, this does not mean that the P/E ratio should be the only
indicator used in financial decisions. Each variable is contingent on a millions factors and the
importance of each factor may have varied over the years. As a result, specific underlying
variables may not contribute the same amount of value to the P/E ratio year over year.
While the P/E ratio can be an invaluable tool to see if the market is overvalued or
undervalued, the ratio does not predict when an overvalued market will decline. This is
because an overvalued market can stay in that state for a prolonged period of time. Due to
these uncertainties, it may be easier to use each of the variables individually rather than
basing investment decision solely on the P/E ratio. Tracking each of these important variables
may create a clearer picture that will predict value of the market.