Expected Annual Return of the Equity Index

Expected Annual Return of the Equity Index

E(R_d)
= (Dividend Yield) + {Capital Appreciation or Depreciation}
= (D/P) - (ΔS) + i + g + (ΔP/E)

(D/P) = Dividend Yield

(ΔS) = % Change in Shares Outstanding (positive when share issuance, negative when share repurchases occur)
i = Inflation Rate
g = Real Earnings Growth
(ΔP/E) = Repricing as economic activity is expected to accelerate in the next 12 months (*)

(*) Repricing refers to changes in nominal earnings multiplier (price/earnings ratio) that determines the share's market price. P/E ratios typically expand as the economy expands and contract as the economy contracts, although not necessarily at the same pace or precisely in sync with each other.

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For instance,

(D/P) = 1.25%

(ΔS) = -1.50% (shares REPURCHASE % of outstanding shares)

i = 2.50%

g = 3.50%

(ΔP/E) = 4.00%

 E(R_d) = (D/P) - (ΔS) + i + g + (ΔP/E) = (1.25) - (-1.50) + 2.50 + 3.50 + (4.00) = 12.75%