Answer: Earnings growth per share

## Explanation In the Grinold-Kroner model, economic growth primarily impacts equity returns through **earnings growth per share**. The model decomposes equity returns into three components: 1. **Expected income return** (dividend yield) 2. **Expected nominal earnings growth** 3. **Expected repricing** (P/E ratio changes) Economic growth drives corporate earnings growth, which directly affects the second component. While dividend yield and P/E repricing also contribute to total returns, earnings growth is the most direct channel through which macroeconomic growth translates into equity market performance. **Key points:** - Economic growth → Corporate revenue and profit growth → Higher earnings per share - This is more fundamental than dividend policy or valuation changes - The model shows earnings growth as the primary transmission mechanism from economic growth to equity returns

Author: LeetQuiz Editorial Team