Long-term price-to-earnings (P/E )ratios in the U.S.stock market of around 15 times are consistent with long-term expected stock returns of around 6 to 7 percent a year in real terms

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Assuming a constant growth rate in earnings and a constant return on capital, the returns to shareholders are composed of a cash yield plus the growth rate in earnings. If the P/E gravitates to 15, then the earnings yield is 1/15 or 6.7 percent. If half of this is paid out to shareholders, then the cash yield is 3.35 percent. If corporate profits continue to grow at 3 to 3.5 percent per year, then summing these two components yields about a 6.5 percent average return.

Long-Term Price-To-Earnings (P/E )Ratios in the U