I would like them to go into a little more detail about the changes that were made to the estimates. I saw that their estimate of fair PE was changed from 15 to 16x earnings under normal margin conditions due to less earnings slippage. The changes in their estimate for emerging markets was far more drastic, dropping the real return estimate from 6.5% to 3.4%. I havent seen any mention of the rationale behind that change.
« How far does the market need to fall to hit Grantham's estimates? »
My best guess, based on what they've written recently, is 40%, a fall from YE2013's $1848 to $1100 (which is approximately 1X sales, officially $1104.96, as of 6/30/2013, tentatively $1115.38, as of 9/30/2013).
They've recently changed either their model or their long standing inputs to the original model. I don't really know which, but my best guess at this point in time is that they're adjusted the long-term, sustainable, real growth rate per share upwards to accomodate the effect of share reductions as a result of buybacks.
From GMO's 3Qtr2013 Letter (November), according to Ben Inker's: "Breaking News! U.S. Equity Market Overvalued!"
"Our recent client conference saw the unveiling of our new forecast methodology for the U.S. stock market, ...
On the old model, fair value for the S&P 500 was about 1020 and the expected return for the next seven years was -2.0% after inflation. On the new model, fair value for the S&P 500 is about 1100 and the expected return is -1.3% per year for the next seven years after inflation."