Explain how the stage of the business cycle shapes expectations for earnings growth over both short and long horizons

Short-term earnings expectations swing with the business cycle, while long-term growth expectations move much less. In a recession current profits fall sharply, especially for cyclical firms with high operating leverage, and forecasts for the next year or two are cut; in recovery they rebound quickly. Long-run earnings growth is anchored by the growth of the economy, so a single downturn changes it only modestly. Because most of an equity's value comes from distant cash flows, a temporary earnings shock moves fair value far less than it moves current earnings. The trap is extrapolating a cyclical collapse or boom in earnings into a permanently lower or higher growth rate, which greatly overstates the change in value.