Forecasting Equity Returns: An Analysis of Macro vs. Micro Earnings and an Introduction of a Composite Valuation Model
String Advisors, Inc
February 9, 2015
Analyses of P/E10 and Market Value/GDP (MV/GDP) market valuation ratios reveal P/E10’s reliance on misconceptions of the differences between micro and macro earnings. Kalecki’s profit function is used to identify and avoid these problems, contest P/E10’s theoretical support, reveal MV/GDP as the metric providing better theoretical and statistical support, introduce the concept of “macro-earnings negativity”, and provide other important implications for economic theory. Based on the MV/GDP metric, we develop a multi-variable forecasting model utilizing both new and prior-researched variables, the most effective of which is a demographic measure. The resulting composite model is much more accurate than popular benchmark metrics, and, relative to popular benchmarks, forecasts considerably lower returns for the coming decade.
Number of Pages in PDF File: 55
Keywords: Kalecki's profit equation, market valuation, CAPE, Asset Price Forecast
JEL Classification: E17
Date posted: February 22, 2013 ; Last revised: February 10, 2015