Abstract
This paper provides novel evidence of the time-varying roles of subjective expectations in explaining stock price variations. Cash flow expectations matter more during times of financial uncertainty and recessions, especially among the hardest-hit industries such as Telecommunications during the dot-com bubble, Financials during the Great Recession, and Healthcare during the COVID-19 pandemic. Conversely, discount rates explain more price variations during expansionary periods. Inflation expectations, while accounting for more than half of price fluctuations in high-inflation environments, play a negligible role otherwise. Finally, factor returns tend to move against earnings growth expectations under low financial uncertainty but move in sync with earnings growth expectations when financial uncertainty is high.
Published Version
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