Relationships between stock returns and real earnings yields over the last 150 years

Abstract

This research finds ex-ante real earnings yields on the S&P Composite Index of equities to be significantly related to their subsequent annual returns over the last 150 years. The real earnings yield forecast is computed by adding a market-based prediction of long-term future inflation to the ratio between the highest past earnings on the S&P Composite and the current level of that stock market index. Equity return deviations from this real earnings yield over the last 150 years have been positively associated with the prior decade's inflation rate but negatively related to the current inflation rate.