The most important drivers of the market's P/E ratio are profit margins and current inflation.

True if GMO or academic empirical models available by 2020 find that profit margins and inflation are the two largest explanatory factors for the variation in the market's P/E ratio. Mostly true if both are among the main drivers but one other factor (e.g. interest rates, which are close to inflation) is comparable in weight. Mixed if only one of the two is shown to be a leading driver. Mostly false if this is a model-specific finding stated as established, and broader evidence names other factors (real rates, volatility, the equity risk premium) as dominant. False if evidence shows neither factor is an important driver.

Set before the research began.

1. E1 GMO Quarterly Letter (2Q 2017), Jeremy Grantham section GMO · 2017 Own record

   “It just shows what has tended to be the market's typical response over the years to major market factors. By far, the two most important of these are profit margins, the higher the better, and inflation, where stable and lower is better, except not too low.”

2. E2 GMO Quarterly Letter (2Q 2017), Ben Inker and Jeremy Grantham sections GMO · 2017 Own record

   “In both approaches, the role of profit margins is dominant. Improved margins not only move the earnings up directly, but also the P/E multiplier applied to those earnings. Inflation is also a strong secondary factor in both approaches,”

3. E3 Reexamining Stock Valuation and Inflation: The Implications of Analysts' Earnings Forecasts Board of Governors of the Federal Reserve System (Steven A. Sharpe, Division of Research and Statistics) · July 2000

   “As can be seen, the real bond yield is estimated to have a large and statistically significant effect on the P-E ratio.”

4. E4 GMO一季度股东信：价值股的背离仅次于科网股泡沫 Sina Finance (Chinese-language reprint of GMO 1Q 2020 letter) · 20 July 2020 Own record

   “模型依赖三个因素，按重要性排序分别是：通胀波动、实际ROE以及GDP波动”

GMO's own letters name profit margins and inflation as the leading P/E factors (E1, E2), but GMO's 2020 model ranks different measures: inflation volatility, real ROE and GDP volatility (E4). The only independent item finds a large effect from the real bond yield but does not compare its weight with margins or inflation (E3), so the evidence does not settle which outcome under the criteria applies.