Some investors may be wondering why stocks have not fallen more. The S&P 500 in the US has rebounded sharply in recent days and is now down by just 15% year-to-date.

Yet US companies are expected to see their earnings decline much more than 15% in the next few quarters. This will make their price-to-earnings ratios seem disproportionately higher than they were last year.

So why is there this gap between stock prices and earnings?

The answer is that stock prices are not a reflection of a single year of earnings. Instead, it is the accumulation of the future free cash flow or earnings that a company will produce over its entire lifetime discounted back to today.

This economic concept is known as the discounted cash flow model. Investor Ben Carlson wrote a brilliant article on this recently.

For example, let’s assume Company ABC is expected