So while this is broadly correct, there are a few things I would question. Firstly, it's not clear whether inflation should be added or not. There's some evidence that, because firms have at least some pricing power, your equity returns have at least some "real" component to them. This is a subject of much debate and very little consensus, so it doesn't get included most of the time. As to equity risk premium, I would disagree that it's "pretty constant". In fact, there's a reason why there's an "equity risk premium puzzle". From that Wikipedia article, there's some sort of accepted wisdom that it's maybe arnd 3-7% in the really long run, but it's also wildly variable (from over 19% in the 1950s to 0.3% in the 1970s, according to the above). So it seems that such a nebulous and uncertain quantity would also be difficult to include. This seems to leave us with the two things that people commonly use, i.e. dividends and "risk-free" rate. Not at all sure about the inflation rate incorporating risk premium. Agree that S&P today can be calculated, in theory, using the dividend discount model. The question we're arguing about here is a little different, though.
I am not sure what you're arguing here, but it would appear that you're agreeing with me... I can offer you a very simple thought experiment as well, if you like.
I think there are two things here. Short term pricing is based on the no arbitrage principle and to that I think we all agree. My post above is more of a long term expected return model that is very broad and obviously debatable. I'm not sure what the short term debate is either. I think all of us are saying the no arbritrage principle applies here.
I agree it's sorta semantics that we're arguing. I am stating that both the "no arbitrage" pricing logic is valid and also that all futures, including index futures, reflect mkt's expectations for where the underlying would be at maturity. In fact, the two statements are tautological.
Based on your other posts I figured we were probably in violent agreement, as Maverick points out I probably didn't get the distinction between short term and longer expected return.
@Martinghoul , by cashflow I mean the ones that flow into the company, not dividends. Dividends (which is a whole other discussion) is just a payout to shareholders... which is therefore a negative cashflow to the company. For example Apple, which has a ton of cash locked-up overseas because they would pay a huge tax when they payout as dividend. So even if a company doesn't pay any dividend they still have a positive CF when they make money. That aside... I'm getting the feeling we all more or less agree. Saying a future basically shows you the index/stock-price level at expiration is the same as saying the current stock price is the price at expiration... which to the inexperienced would mean he 'knows' exactly where the price is at t=x... Which is completely false, because we will not know that, since there will be other factors in play which change the landscape. Any news etc. So, I'm saying is that a the assumption that the future price points out the index price at t=x is too basic and therefore false. Except maybe in the case of commodities, where a future has less to do with the current spot value of the underlying commodity and more to do with the supply/demand of the spot at t=x. The current price of anything is always right according to the EMH but that doesn't mean it stays where it is, whatever is incorporated in the discounting.