Forecasting Equity Returns: An Analysis of Macro vs. Micro Earnings and an Introduction of a Composite Valuation Model
55 Pages Posted: 22 Feb 2013 Last revised: 10 Feb 2015
Date Written: 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.
Keywords: Kalecki's profit equation, market valuation, CAPE, Asset Price Forecast
JEL Classification: E17
Suggested Citation: Suggested Citation