Aggregate Earnings and Global Equity Returns

Abstract

This paper compares the predictive power of aggregate earnings for equity returns in international markets. We rank 51 non-US countries based on the time-series averages of their price synchronicity and market concentration measures, calculated at the firm-level using daily data. We find that aggregate earnings negatively predict one-quarter-ahead stock returns in country groups that contain less synchronous and concentrated markets, as opposed to country groups that contain more synchronous and concentrated markets. We attribute the negative predictive power of aggregate earnings to a business cycle effect since high (low) corporate earnings correspond to economic expansions (contractions) which tend to be associated with negative (positive) risk premia. However, this business cycle effect is offset by the positive relation between firm-level earnings and future stock returns that translates to the aggregate level in more synchronous and concentrated markets. Our results remain robust after controlling for various macroeconomic variables and in alternative samples.

Keywords: aggregate earnings, return predictability, price synchronicity, international asset pricing