Stephen E. Jones examines whether traditional valuation metrics like CAPE misunderstand how macro profits actually work, arguing Market Value/GDP offers stronger forecasting power. The paper ties elevated corporate profits to debt expansion and demographics, then builds a composite model projecting unusually weak real equity returns.
Forecasting Equity Returns: An Analysis of Macro vs. Micro Earnings and an Introduction of a Composite Valuation Model
String Advisors
Stephen Jones
Research
49 Pages
Key Takeaways
MV/GDP Dominance: Market Value/GDP produced a 0.53 adjusted R² forecasting 10 year real returns, outperforming P/E10 at 0.38 and Tobin’s q at 0.49.
Debt Driven Profits: Corporate profits reached 18.4% of GDP in 2011 versus roughly 10% to 12% historically, largely driven by higher government debt and lower personal savings.
Bearish Composite Signal: The composite model achieved a 0.91 adjusted R² and projected negative 9.7% annual real returns, implying an S&P 500 level near 670 by 2023.
Join our newsletter to have all of this content + Exclusive Newsletter Bonus Content delivered to your inbox every week
