How much is already priced in, precisely?

Price-implied market expectations: how to measure it.

Francesco Ferrari

Jun 03, 2025

Equity markets are always discounting mechanisms.

So, the million dollar question is always the same.

How much is the market pricing in? How many months, or years, precisely?

Money is made simply by arbitraging expectations.

If we can buy companies at levels where not all future catalysts are already priced in, we will make money.

We just need to withstand short-term sentiment swings and broad market turbulence.

That’s really it.

Yet what sounds simple in investing, it’s not easy when applied.

So the key for us investors is two-fold:

How to properly measure expectations?
How to anticipate situations where the revisions of expectations are more likely to occur?

For today, we’ll stick to point 1.

Which is a delicate topic.

Thanks for staying with me until the end, let’s go!

Understanding Price-Implied Expectations

If you’ve read “Expectations Investing” by Rappaport and Mauboussin, you learnt to be obsessed with a precise idea.

Money is made arbitraging expectations revisions.

In other words: considering how a certain amount of expectations is already factored in, what’s the likelihood for these expectations to be reviewed frequently?

Therfore, forcing the market to adjust its view on a company to the upside?

→ The first step to answer this question though, is to calculate the current levels of expectations.

How?

The authors provide a PIE (Priced-Implied Expecations) Model which is a perpetuity-with-inflation method.

A what?

It’s simply a DCF model with fixed assumptions:

Fixed NOPAT
Fixed WACC
Fixed Revenue Growth Projections
A Terminal Value calculated as usual:
- FCF of the last year, times
- (1 + growth rate) / (WACC - inflation rate)
Equity Value derived as difference between Assets and Liabilities

Technically, the authors suggest extending the forecast period (= number of years) as far as necessary to reach the current stock price.

When the estimate of a stock’s fair value matches current stock price, that’s the price-implied expectations period.

Let’s visualize it with an example!

META: how many years already priced in?

Spoiler: it’s a lot of numbers, but it’s not as complicated as it seems.

Let’s follow the book’s guidelines.

Step 1: From Sales to FCF.

In this view, I had to plug in a few assumptions - not by scenario here, to keep things more readable:

Projected Sales Growth → 12%
Projected EBIT → 45%
Projected Tax Rate → 23%
Result: the NOPAT (Net Operating Profit After Taxes) evolution.

From this point to Free Cash Flow, the authors adjust for:

Incremental Change of Net Working Capital Investments → we assume it at 0 for simplicity
Incremental Change in CAPEX → we assume a $7B incremental change for every year

The next step is straightforward:

Free Cash Flow for each year as NOPAT minus the two;
Everything discounted for an agreed WACC.

Nothing incredibly new.

Step 2: From FCF to Equity Value per Share.

I’ll be brief.

The Equity Value per Share is then calculated as:

Corporate Value minus Debt
Divided by the shares count

Corporate Value is found by calculating the sum of all future cash flows, including the Terminal Value - obtained by dividing the final year’s FCF by WACC minus inflation (2.5%).

Share count assumed in downfall (-1% net buyback per year).

Step 3: check how many years are priced in.

The answer: 11!

Using this model, META’s today’s price only matches fair value estimations after year 10.

So yes, we have a problem here.

Where is the market, in this model?

In a standard DCF model, the market itself doesn’t show up.

WACC is fixed, terminal growth rate is fixed, debt is fixed.

So as usual, DCFs fail to factor in what the market is actually thinking about a stock.

The model is too rigid around the mathematical discounting of TV and its components.

So, with all due respect, I’d like to show you what happens when you actually let market sentiment in.

Here’s how 👇🏼

Adjusted PIE Model

Let’s maintain the structure until FCF.

And let’s remove everything below.

Now, the only addition is a market multiple!

18x FCF for META.

Just like the new dashboard shows:

The Equity Value per Share will become nothing more than the photography of:

FCF, times
Sentiment Multiple, divided by
Shares Count

(rolling, year by year).

What do we notice?

Surpirse surprise, the forecast period has now decreased from 11 to 5 years.

What this means is, once again, that:

At 12% Sales Growth,
45% EBIT margin
-1% Buyback yield
18x Multiple

The market may be pricing in 5 years of growth.

Will the market review its expectations?

Because that’s the million dollar question.

Don’t be intimidated by the apparent long period of time that is already priced in.

In fact, the market is ready to push the stock price up if new expectations are formed.

So, if you found out that META has 3 years of future growth priced in, but:

You can show how the company has what it takes to force the market to update its expecations to the upside:
- Innovations pushing sales growth above 15%?
- Optimizations driving NOPAT way higher?
- Business reacceleration demanding a higher multiple?
Your investment horizon is higher than the PIE forecast period
You can withstand short-term volatility

Congratulations!

You will hit a profitable investment.

Invest in Surprising Stories

Of course, if this were enough it would be too easy.

That said, it’s always nice to sense what the market is thinking and how to operate from this angle.

The messages I want to give you today will sound familiar to long-time supporters:

Don’t be a religious user of DCFs: they don’t make money by themselves
Respect the market and factor in its sentiment before it’s too late
Always think longer than 3 years
Find companies that are able to deliver surprise (that’s the word! S u r p r i s e)!
Control your emotions on the way

That is all friends.

Accounting for Investing Masterclass - [tune-in!]

As anticipated:

I am preparing a self-paced Masterclass to help aspiring investors remove the bottleneck of Financial Statements and start investing with higher confidence.

Thanks to those who already signed-up!

You can find the syllabus and the details here: