Forecasting Stock Returns

Abstract

To assess future returns an investor must understand the components on which returns are based. These components include the growth in the P/E ratio and the growth in real earnings. Our analysis shows that the growth rate in the P/E ratio and the growth rate in real earnings, as estimated over long periods and reported in the literature, have tended to obscure some important changes in the growth rates of these two variables. Examining the growth rates over shorter intervals reveals a different story and may offer insight into better forecasts of market returns.