Equity Portfolio Management: A Statistical Assessment of the Predictive Capacity of the P/E Ratio Relative to SIRRIPA Across Six-Month and Two-Year Horizons

This study evaluates the predictive capacity of the traditional Price–Earnings (P/E) ratio relative to the Potential Payback Period (PPP)-derived Stock Internal Rate of Return Including Price Appreciation (SIRRIPA) within the context of equity portfolio management. Using a sample of major U.S. technology stocks, we conduct a statistical comparison across two investment horizons: six months and two years. Pearson correlation, OLS regression, Spearman rank tests, quintile spreads, and formal null-hypothesis testing are employed to assess explanatory strength and directional coherence. Results show that over a six-month horizon, the PPP-derived return framework exhibits moderate predictive power, while the P/E ratio remains statistically insignificant. Over a two-year horizon, SIRRIPA demonstrates materially stronger explanatory capacity, accounting for a substantial share of cross-sectional return variation and strongly rejecting the null hypothesis of no relationship. By contrast, the predictive performance of the P/E ratio remains weak and unstable across horizons. The findings suggest that return-space valuation metrics derived from the PPP framework offer structurally superior guidance for portfolio allocation compared to static price-space multiples, as represented by the P/E ratio, particularly as the investment horizon lengthens.