Oliver Wyman Forum Overhauls The Science Of Stock Market Valuation
March 17, 2022
New white paper published today introduces an equity market valuation metric that outperforms all others
Reveals 10 critical insights into the US economy and markets
Re-engineers the Capital Asset Pricing Model (CAPM) to make it work in practice
Uncovers the 10 hidden risks in the Treasury market
New York, March 17, 2022 — The Oliver Wyman Forum, Oliver Wyman’s research and leadership community, today published the third in a series of five white papers that, taken together, provide the most comprehensive analysis of the US financial markets ever developed. Oliver Wyman is a business of Marsh McLennan (NYSE: MMC).
The paper titled, Overhauling the Science of Valuations combines finance, accounting, analytics, economics, history, and sociology to re-imagine concepts of financial analysis that were developed half a century ago but that have stagnated ever since.
This white paper has broad reach:
First, it introduces a new equity-market valuation metric that is timelier than the price/earnings (P/E) ratio and less volatile than the cyclically adjusted price/earnings ratio (CAPE) based on 10-year-average earnings. In other words, the new valuation metric beats both on even their best features.
Second, the paper reveals 10 critical insights into the US economy and markets that are not part of the common knowledge of professional investors, but should be. For instance, we show that breakeven inflation expectations are a poor measure of the market’s view of expected inflation, but a very good, if misunderstood, measure of risk conditions.
Third, it confirms that the traditional CAPM fails in practice, but also that the failure is due to executional issues. It proceeds to fix those issues and show that the re-engineered CAPM is a powerful explainer of equity prices over the last century and a half.
Finally, the paper turns to the Treasury market, highlighting 10 largely unknown risks that both influence long-term Treasuries and hide the true risk-free interest rate that helps determine whether equities are over- or undervalued.
“This is another example of Oliver Wyman’s ability to create breakthroughs in the most challenging problems facing business, finance, and society,” said Nick Studer, President and CEO of Oliver Wyman.
“Anyone interested in drilling down into the US stock and Treasury markets will benefit from close study of this paper and the thinking behind it,” said John Romeo, Managing Partner of Oliver Wyman and Head of the Oliver Wyman Forum.
Jacques Cesar, a former managing partner of Oliver Wyman and the author of the five white papers, notes that different parts of the third paper will interest different communities. For example, the academic community will be most interested in the reengineering of the CAPM. Treasury and Federal Reserve officials will be most interested in the quantification of the linkage between tax and monetary policy and equity prices. And investors and money managers will improve their decision-making by leveraging the highly accurate modeling of the true drivers of equity and Treasury prices.
About the Oliver Wyman Forum
The Oliver Wyman Forum is Oliver Wyman’s think tank, dedicated to building leadership communities to drive new solutions to shared global challenges. The Oliver Wyman Forum engages leading thinkers and develops new research to inspire action based on innovative insights on three fronts: Reframing Industry, Business in Society, and Global Economic and Political Change. Together with our growing and diverse community of experts, we focus on making a difference. For more ideas, sign up to receive Ready or Not, our monthly newsletter, follow us on LinkedIn, or visit www.oliverwymanforum.com.
About Oliver Wyman
Oliver Wyman is a global leader in management consulting. With offices in more than 70 cities across 30 countries, Oliver Wyman combines deep industry knowledge with specialized expertise in strategy, operations, risk management, and organization transformation. The firm has more than 5,000 professionals around the world who work with clients to optimize their business, improve their operations and risk profile, and accelerate their organizational performance to seize the most attractive opportunities. Oliver Wyman is a business of Marsh McLennan [NYSE: MMC]. For more information, visit www.oliverwyman.com. Follow Oliver Wyman on Twitter @OliverWyman.