> It seems to me that Price growth materializes through some combination of EPS growth, PE expansion, market enthusiasm. <
Agreed, although I think "PE expansion" and "market enthusiasm" are the same thing (not two separate things). And that's exactly what I'm trying explain at http://naicwiki.editme.com/SSGSection5 under Components of Total Return. I did reword the first sentence to try and make it clearer that we're talking about an estimate of the potential for future return, not past return that has actually been achieved.
I think of it this way (and maybe I should say it this way). There are two effects that combine to affect potential future price. First, EPS growth, on average and over the long term, can be expected to drag price up along with it at more or less the same rate. If it's reasonable to expect 15% future EPS growth it's reasonable to expect that future price will appreciate at about 15% too. Second, it's reasonable to expect future changes in PE (reflecting changes in investor optimism) to push the rate of price appreciation above or below the rate of EPS growth. In other words, EPS growth continues to affect price over the long term (because EPS growth can persist for decades) while changes in PE level affect price most only over the short term (because PE levels tend to fluctuate up and down within a range, rather than consistently increasing without limit).
This has two important implications (which I'm also trying to explain at the above web page). First, it's reasonable to expect to enjoy price appreciation due to EPS growth by holding a stock for as long as EPS growth continues unabated. As long as EPS keeps going up at a consistent rate, it's reasonable to expect (on average and over the long term) that price will also keep going up at about that same rate. Second, the longer you hold a stock (while EPS growth continues) the *less* you should expect to benefit from PE expansion (or be hurt by PE contraction). In other words, the only way to actually benefit from PE getting higher (or avoid being hurt by PE getting lower) is to actually sell the stock when PE is higher than when you bought it. You don't benefit more from PE expansion by holding longer (because PE's don't stay unusually high over the long term and will eventually revert to some average level).
Say your SSG suggests that 15% is a rational potential future total return over five years, based on your judgment that presumes (also over five years) some level of EPS growth along with some degree of increased PE (say, from 20 to 30, just for the sake of discussion). If you expect that level of EPS growth to continue over, say, 10 years is it rational to also expect potential total return of 15% over ten years? Probably not. If you think 30 is a rational limit to how high you feel PE could go over five years it should also be a rational limit for high PE over ten years. A PE level of 30 should remain a rational upper limit regardless of how long you might own the stock. By holding the stock longer than the five year period of your SSG study you simply spread out the same amount of potential PE expansion over a longer period of time, which *reduces* the potential total return (to something closer to the EPS growth rate). Again, the only way to actually benefit from PE expansion is to actually sell the stock (when the PE is high).
> EPS (growth), by itself, will not contribute to a positive Total Return, unless the Price increases. If the PE expands, the EPS could be lower or flat, but it is the price that dictates that return, whether that return be positive or negative. <
Agreed. However, the purpose of section 4A is to develop an estimate of a potential high price by thinking about what might be rational and attainable levels of EPS and PE. A rational potential level of future EPS growth combined with a rational potantial level of future PE is what produces the rational estimate of future high price. In other words, we're assuming that if EPS grows to a certain level and PE increases (or decreases) to a certain level then the price will also adjust accordingly to whatever level would be necessary to make EPS multiplied by PE equal to Price. That's the whole premise of section 4A.
> A mere PE change means nothing until the components are evaluated. The PE is the effect of the relationship of Price and Earnings, not the cause. <
You're correct that neither presumed future EPS growth nor presumed future PE change is any guarantee of actual price change, either up or down, (or of actual EPS growth or actual PE change). But an presumed future EPS level combined with a presumed future PE level *does * imply a specific presumed price level. You can certainly debate what is the real cause and what is the real effect but I don't think that gets you anywhere unless you're rejecting the premise of section 4A (that EPS x PE = Price is just as valid as Price / EPS = PE and knowing any two of those values allows you to calculate the third).
-Jim Thomas | 
