In order to look at the effect demographics have on equity multiples, the writers examined the ratio of middle aged population (40-49) to old age population (60-69) in the US. They dub this the "M/O Ratio." The thesis is that at middle age the average investor will have a greater risk tolerance and therefore a larger proportion of savings in equities, which should boost equity valuations. As a person ages and reduces risk tolerance, he or she will tend to shift to fixed income investments, depressing equity multiples and interest rates. Thus higher (lower) M/O ratios should lead to higher (lower) equity multiples over time.
The analysis isn't particularly complicated, but the results are striking. The M/O ratio turns out to be a pretty good forecasting tool for long term P/E multiples.
If the authors extend a projection for the M/O ratio through 2030, the forecast for equity markets isn't particularly encouraging. According to the model, the P/E ratio should bottom at around 8.5 in 2025. That's a long bear market...
The full article can be found here: http://www.frbsf.org/publications/economics/letter/2011/el2011-26.html