Abstract: This brief attempts to explore the impacts of basic macroeconomic variables on stock prices. Taking US stocks as an example, the Discounted Cash Flow model is employed for valuation, and five basic variables are taken into account, including real economic growth rate, inflation rate, nominal interest rate, equity risk premium, and terms of trade. In the base case scenario, the calculated Price-to-Earnings (PE) ratio for US equities is approximately 24.4. Building on this, the brief establishes nine different scenarios of the US economy and calculates their respective P/E ratios of US equities.
The brief finds that the factor of real growth rate is not as important for equity valuation as one might think, while the nominal interest rate and inflation rate are crucial for equity valuation.
