From P/E to the Potential Payback Period (PPP): Demonstrating the Explanatory and Predictive Power of Growth- and Risk-Adjusted Valuation Across Global Stock Markets (2025)

1. Introduction: The Limits of the P/E Ratio in Cross-Market Comparison

The price-to-earnings (P/E) ratio remains one of the most widely used metrics for stock and market valuation. However, when used without adjustment, it is inherently static and misleading, especially for cross-country comparisons.

P/E fails to account for two decisive forces:

• Earnings growth (g) — the dynamic component of future profitability, and
• Discount rate (r) — the risk- and time-adjusted required rate of return.

As a result, a high P/E may reflect optimistic growth expectations rather than overvaluation, while a low P/E may represent risk premia rather than genuine undervaluation.

The Potential Payback Period (PPP) redefines valuation in temporal rather than static terms, measuring the number of years required for cumulative, discounted earnings to equal the price paid for a share (or, by extension, for a unit of a stock market index). This transformation allows valuation to be expressed in units of time rather than in a dimensionless ratio, restoring interpretability and comparability across markets.

2. Theoretical Framework: From P/E to PPP

The PPP integrates price, growth, and discount rate into a single unified valuation expression:

$$PPP={\displaystyle \frac{\log (\frac{P/E\times (g-r)}{1+r}+1)}{\log \left(\frac{1+g}{1+r}\right)}}$$

When both $g$ and $r$ are zero, or when $g=r$, this formula reduces to the traditional P/E ratio, confirming that PPP is a mathematical generalization of P/E.

Unlike P/E, the PPP internalizes time value, risk, and growth dynamics, making it universally comparable across sectors, companies, and national stock markets.

Its derivative measure, the Stock Internal Rate of Return (SIRR), translates the temporal valuation concept into a yield-like interpretation:

$$SIRR=2^{{\displaystyle \frac{1}{PPP}}}-1$$

The SIRR expresses the annualized “internal yield” implied by a stock or market’s payback period, thereby bridging valuation theory and rate-of-return analysis.

3. Data and Scope

This study applies the PPP and SIRR frameworks to national stock indices representing the world’s ten largest equity markets.

For each country, three inputs were gathered as of February 7, 2025:

• P/E ratio
• Expected annual earnings growth (g)
• Long-term discount rate (r)

The PPP and SIRR were computed from these values. The analysis covers:

United States, France, Germany, United Kingdom, Japan, China, Taiwan, South Korea, India, and Brazil.

4. Comparative Table of Global Market Valuations (February 7, 2025)

Note on the “1-Y Perf.” Column.

The “1-Y Perf.” (1-Year Performance) column represents the total price return of each country’s main stock market index over the twelve months preceding February 7, 2025 — that is, from February 7, 2024 to February 7, 2025.

It provides contextual background for each market’s valuation at the time the PPP analysis was conducted. This column does not enter directly into the PPP or SIRR calculations.

Instead, it indicates how much each market had already appreciated or declined during the prior year. By contrasting this retrospective performance (historical momentum) with subsequent returns (February 7 → October 3, 2025), the analysis evaluates the predictive power of PPP and SIRR over future outcomes.

5. Empirical Test: From Explanation to Prediction

Comparing PPP values on February 7 with realized stock-market returns through October 3, 2025, confirms the predictive validity of the PPP methodology.

Markets with lower PPPs (and higher SIRRs)—notably South Korea, China, Japan, Taiwan, Brazil, and Germany—were the top performers in the subsequent eight-month period.

These correlations indicate a strong inverse relationship between PPP and realized returns, and a positive linear association between $1/PPP$ and performance. In essence, markets that appeared fundamentally cheaper (shorter payback periods) in February 2025 went on to outperform those that were relatively overvalued.

6. Discussion: Why PPP and SIRR Outperform P/E

The findings highlight several structural advantages of PPP and SIRR over traditional valuation metrics:

• PPP restores temporal meaning.
  P/E is a dimensionless ratio; PPP expresses valuation in years of payback, reintroducing time into valuation analysis.
• PPP adjusts for growth and risk.
  Incorporating $g$ and $r$ ensures that valuations reflect both expected profitability and required returns, enabling cross-market comparability.
• SIRR transforms valuation into a yield-like measure.
  It converts PPP into an annualized internal rate of return, allowing direct comparison with bond yields or risk-free benchmarks.
• Predictive coherence.
  Markets with high SIRRs consistently show higher realized returns, as they represent undervaluation relative to fundamentals.

Together, these properties unify valuation, return expectation, and risk-adjusted comparison in a single theoretical framework.

7. Conclusion: From Static Ratios to Dynamic Horizons

This application of the PPP and SIRR methodologies to global stock markets confirms their dual capacity:

• Explanatory, by rationalizing observed valuation disparities once growth and risk are included, and
• Predictive, by correctly anticipating relative market performance during 2025.

The evidence demonstrates that P/E ratios are irrelevant and misleading in isolation. Only by adjusting for earnings growth (g) and discount rate (r) can valuations become meaningful, comparable, and forward-looking.

The Potential Payback Period (PPP) and Stock Internal Rate of Return (SIRR) thus provide a coherent, universal framework for global equity valuation — marking the transition from static ratios to dynamic, time-based horizons in financial analysis.