Calculate the implied contribution to Cambo’s US equity return forecast from the expected change in the P/E.

At the investment committee meeting, the firm’s chief economist predicts that the economy will enter the late expansion phase of the business cycle in the next 12 months.

Jan Cambo is chief market strategist at a US asset management firm.
While preparing a report for the upcoming investment committee meeting, Cambo updates her long-term forecast for US equity returns.
As an input into her forecasting model, she uses the following longterm annualized forecasts from the firm’s chief economist:

Based on these forecasts, Cambo predicts a long-term 9.0% annual equity return in the US market. Her forecast assumes no change in the share of profits in the economy, and she expects some contribution to equity returns from a change in the price-to-earnings ratio (P/E).

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Labor input will grow 0.5%. Labor productivity will grow 1.3%. Inflation will be 2.2%. Dividend yield will be 2.8%.