Scenario probability tree

The scenario probability tree is how the monthly outlook surface translates qualitative macro views into a quantified implied fair-value range. The tree enumerates four to six mutually exclusive macro branches — typical examples are soft landing, hard landing, no landing, and reaccelerating inflation — assigns a probability to each branch, and computes the implied index fair value under each conditional. The probability-weighted average of the branch fair values becomes the headline number; the spread between the worst-case and best-case branches becomes the implied fair-value band. The discipline imposed by the tree is that probabilities must sum to 100% and each branch must carry an explicit set of conditional assumptions on growth, inflation, policy rate, and earnings. This rules out the common analyst trick of holding a directional view while also hedging with a wide range — if the bear branch has 20% probability, the analyst owns that 20%, and a 25-point spread between bull and bear means the bull branch is doing real work. The tree is recomputed every month as conditional probabilities are repriced.