Valuation Ratios and the Long-Run Stock Market Outlook

How can aggregate stock market valuation ratios - the dividend-price ratio and earnings-price ratio - fail to predict future stock price movements in the denominator, given that these ratios themselves are mean-reverting? If these ratios predict the growth rates of dividends or earnings, the answer...

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Bibliographic Details
Published in:Journal of portfolio management 1998-12, Vol.24 (2), p.11-26
Main Authors: Campbell, John Y., Shiller, Robert J.
Format: Article
Language:English
Subjects:
Dividends
Earnings forecasting
Efficient markets
Financial ratios
Price earnings ratio
Prices
Ratios
Securities markets
Statistical analysis
Stock prices
Studies
Valuation
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Summary:How can aggregate stock market valuation ratios - the dividend-price ratio and earnings-price ratio - fail to predict future stock price movements in the denominator, given that these ratios themselves are mean-reverting? If these ratios predict the growth rates of dividends or earnings, the answer is movements in the numerator. Given the analysis of long aggregate historical stock market data from the US and 11 other countries, it is concluded that these ratios do not forecast dividends or earnings, certainly not consistently in the right direction. The analysis suggests a gloomy next 4 or 10 years for the US and some other stock markets.
ISSN:0095-4918
2168-8656
DOI:10.3905/jpm.24.2.11