Forecasting Equity Returns: An Analysis of Macro vs. Micro Earnings and an Introduction of a Composite Valuation Model
String Advisors, Inc
July 6, 2014
Our analysis of P/E10 and Market Value/GDP market valuation ratios reveals P/E10’s reliance on misconceptions of the differences between micro and macro earnings. Next, Kalecki’s profit function is used to identify and avoid these problems, and Market Value/GDP is presented as the metric providing better theoretical and statistical support. Based on the Market Value/GDP metric, we develop a multi-variable forecasting model which utilizes both new and prior-researched variables, the most effective of which is a demographic measure. The resulting composite model is significantly better, and forecasts considerably lower returns for the coming decade than do popular benchmark metrics.
Number of Pages in PDF File: 54
Keywords: Kalecki's profit equation, market valuation, CAPE
JEL Classification: E17working papers series
Date posted: February 22, 2013 ; Last revised: July 8, 2014
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