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Earnings Extrapolation and Predictable Stock Market Returns

Author

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  • Hongye Guo

Abstract

The U.S. stock market’s return during the first month of a quarter correlates strongly with returns in future months, but the correlation is negative if the future month is the first month of a quarter, and positive if it isn’t. These correlations offset, consistent with the well-known near-zero unconditional autocorrelation, yet they are pervasive, present across industries and countries. The pattern accords with a model in which investors extrapolate announced earnings to predict future earnings, not recognizing that earnings in the first month of a quarter are discretely less predictable than in prior months. Survey data support the model.

Suggested Citation

  • Hongye Guo, 2025. "Earnings Extrapolation and Predictable Stock Market Returns," The Review of Financial Studies, Society for Financial Studies, vol. 38(6), pages 1730-1782.
    • Handle: RePEc:oup:rfinst:v:38:y:2025:i:6:p:1730-1782.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhaf020
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    More about this item

    Keywords

    G12; G14; G40;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G40 - Financial Economics - - Behavioral Finance - - - General

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