Final answer:
Capital market expectations are formulated through a methodical analysis of economic indicators and global events rather than solely on historical data. Analysts predict market trends by identifying undervalued companies with future potential and use complex models to analyze multiple variables in a changing market.
Step-by-step explanation:
The steps to formulating capital market expectations involve a systematic approach rather than predictions without analysis or a reliance solely on historical data. An economist or analyst would typically consider a range of economic indicators and reflect on how global events could impact the markets. They analyze the market, recognizing that many factors affecting the market are changing simultaneously, requiring a multi-faceted approach. For instance, they might predict stock market trends by finding companies that have poor prospects currently but are expected to perform well in the future.
When economists analyze the market, they often employ models that can hold multiple variables at once and use techniques to isolate the effects of individual variables. These methods allow them to predict potential outcomes, such as points on a stock market index, based on their analysis rather than on past performance alone. The actual performance is then compared to these predictions to refine the models further.