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

Stephen Jones

String Advisors, Inc

Date Written: February 9, 2015

Abstract

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

Jones, Stephen, Forecasting Equity Returns: An Analysis of Macro vs. Micro Earnings and an Introduction of a Composite Valuation Model (February 9, 2015). Available at SSRN: https://ssrn.com/abstract=2222008 or http://dx.doi.org/10.2139/ssrn.2222008

Stephen Jones (Contact Author)

String Advisors, Inc ( email )

New York, NY 10022
United States

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