by AdvisorAnalyst.com Staff
Every stock price contains a confession. Part of it admits what a company earns today. The rest is a bet on what it might become. Michael Mauboussin and Dan Callahan, writing for Morgan Stanley's Counterpoint Global Insights, have built a rigorous framework for separating those two components — and the signal it sends about today's market is worth taking seriously.
Their report, Opportunities and Expectations1, published June 18, 2026, revives a concept called the present value of growth opportunities — PVGO for short. Coined by financial economist Stewart Myers, PVGO is the slice of a stock's price that isn't about today's earnings at all. It's about what a company might do next. "Growth here refers to value creation," the authors write, "the ability to earn a return on investment higher than the opportunity cost of capital. 'Opportunities' captures the idea that these investments are options, which confer the right but not the obligation to act."
The math is straightforward. Take current earnings, divide by the cost of equity, and you get the "steady-state" value — what the business is worth if nothing ever changes. Everything above that is PVGO. With a cost of equity of 8.75 percent, the steady-state P/E works out to 11.4. The S&P 500's actual P/E, based on 2026 consensus earnings as of June 12, was 21.9. That gap? The market's collective bet on future growth.
What History Says
Mauboussin and Callahan tracked PVGO as a share of S&P 500 price from 1961 to 2025. On average, it's run at 35 percent. The steady-state handles the other 65. There have been times the market priced in almost no future growth — 1974 and 2011 stand out. And times it priced in enormous optimism — the dot-com peak of 1999 and 2001. At year-end 2025, PVGO was "well above the average."
Does a high PVGO predict weak returns? Somewhat. Comparing PVGO levels to subsequent 10-year total shareholder returns, the authors find a negative correlation of -0.26. "Lower PVGO percentages are associated with higher subsequent TSRs, and higher percentages are followed by lower TSRs," they note — but they're quick to add that the correlation is "only moderate." In the lowest PVGO quartile, 10-year annualized returns averaged 11.6 percent. In the highest, 7.6 percent. The conclusion is honest: "PVGO percentage provides a decent signal when it reaches extreme levels but is a poor tool for timing in general."
Where the Real Edge Is
Individual stocks are where PVGO gets interesting. Here the authors use a more precise method — capitalizing trailing NOPAT (net operating profit after taxes, adjusted for intangibles) by the weighted average cost of capital, subtracting net debt, and arriving at a steady-state equity value. PVGO is what's left over.
Across U.S. companies with market caps above $1 billion from 1990 to 2024, low-PVGO stocks delivered a median five-year annualized return of 8.7 percent. High-PVGO stocks: 5.0 percent. Split the universe simply into low and high halves, and "the return spread is positive in about 90 percent of the years and averages 2.6 percentage points over the full span." That kind of consistency matters.
Reading the Company Stories
The case studies are some of the most revealing parts of the report. NVIDIA is now the world's largest company by market cap — yet its PVGO percentage "is lower than it was, on average, in the early 2000s." The stock's extraordinary run came from earnings delivery, not expanding expectations. As the authors note, "the PVGO percentage is today similar to what it was at the end of 2016."
Microsoft tells a different story. Its PVGO hit 85 percent in 1999, then cratered to negative 53 percent by 2012 — a decade of flat stock price even as profits kept growing. Amazon's PVGO topped 100 percent in the late 1990s when it was losing money, and has drifted steadily lower since, hitting its lowest year-end reading since the 1997 IPO at the close of 2025. JPMorgan shows the financial sector's pattern — PVGO peaked around 40 percent before 2008, then went sharply negative through the crisis.
A Better Lens Than Book Value?
The report's sharpest provocation may be its case against the traditional value factor. The Fama-French HML signal — sorting stocks by book-to-price — has been fading since the early 2000s. Mauboussin and Callahan point to a straightforward reason: "the shift from tangible to intangible investment, which has made book value a less relevant financial measure."
PVGO, built with intangible-adjusted earnings, appears to hold up better. Over five-year rolling periods from 1990 to 2024, "the PVGO percentage seems to provide higher, and more consistent, returns" — running 230 basis points ahead of the value factor on average.
Key Takeaways for Advisors and Investors
The S&P 500's PVGO sits well above its long-run average. That's not a crash signal — but it's a meaningful headwind for passive equity returns over a 10-year horizon.
At the stock level, low embedded expectations have historically beaten high embedded expectations by roughly 260 basis points a year, consistently enough to be structural rather than lucky.
Book-to-price is a blunt instrument for today's intangible-heavy economy. PVGO adjusted for intangibles may read expectations more cleanly.
Don't try to time the market with PVGO. The signal only sharpens at extremes. Use it to frame what's already priced in — not to call the next turn.
When a stock's PVGO is compressing even as the price rises, that's often earnings catching up to prior optimism. Understanding which force is driving a return changes how you think about what comes next.
Footnote:
1 "Opportunities and Expectations: The Present Value of Growth Opportunities in Valuation," Michael J. Mauboussin and Dan Callahan, CFA, Morgan Stanley Counterpoint Global Insights, June 18, 2026. For informational and educational purposes only. Not investment advice.
