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Playing on profits cycle?


  • Dmitry Baryshevsky


In the article it is shown that year-to-year change of the S&P 500 does not depend on profits cycle. On the other hand, year-to-year change of earnings multiple P/E tends to anticorrelate with profits cycle. It shows sluggishness of market response in relation to profits cycle. It is shown that there is one important condition for development of new long-term bull trend. It is presence of phase of earnings accumulation. Such accumulation is possible only during periods of significant outstripping of earnings growth over the market growth. Now there is no phase of earnings accumulation, because market returned to 8% long-term growth rate, which outstrips the 5.5% long-term earnings growth rate. Such conditions can support only sideways market at best.

Suggested Citation

  • Dmitry Baryshevsky, 2003. "Playing on profits cycle?," Finance 0311006, EconWPA.
  • Handle: RePEc:wpa:wuwpfi:0311006
    Note: Type of Document - pdf; prepared on WinNT; to print on HPLaserJet; pages: 9; figures: 10 color figures . PDF, 10 color figures included

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    References listed on IDEAS

    1. Joel Lander & Athanasios Orphanides & Martha Douvogiannis, "undated". "Earnings Forecasts and the Predictability of Stock Returns: Evidence from Trading the S&P;," Finance and Economics Discussion Series 1997-06, Board of Governors of the Federal Reserve System (U.S.).
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    4. Fama, Eugene F & French, Kenneth R, 2000. "Forecasting Profitability and Earnings," The Journal of Business, University of Chicago Press, vol. 73(2), pages 161-175, April.
    5. Eugene F. Fama & Kenneth R. French, 2002. "The Equity Premium," Journal of Finance, American Finance Association, vol. 57(2), pages 637-659, April.
    6. Steven A. Sharpe, 1999. "Stock prices, expected returns, and inflation," Finance and Economics Discussion Series 1999-02, Board of Governors of the Federal Reserve System (U.S.).
    7. Steven A. Sharpe, 2002. "Reexamining Stock Valuation and Inflation: The Implications Of Analysts' Earnings Forecasts," The Review of Economics and Statistics, MIT Press, vol. 84(4), pages 632-648, November.
    8. Shiller, Robert J, 1981. "Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?," American Economic Review, American Economic Association, vol. 71(3), pages 421-436, June.
    9. Rajnish Mehra, 2003. "The Equity Premium: Why is it a Puzzle?," NBER Working Papers 9512, National Bureau of Economic Research, Inc.
    10. Ellen R. McGrattan & Edward C. Prescott, 2000. "Is the stock market overvalued?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 20-40.
    11. Merton H. Miller & Franco Modigliani, 1961. "Dividend Policy, Growth, and the Valuation of Shares," The Journal of Business, University of Chicago Press, vol. 34, pages 411-411.
    12. Lant Pritchett, 1997. "Divergence, Big Time," Journal of Economic Perspectives, American Economic Association, vol. 11(3), pages 3-17, Summer.
    13. Christophe Faugère & Julian Van Erlach, 2006. "The Equity Premium: Consistent with GDP Growth and Portfolio Insurance," The Financial Review, Eastern Finance Association, vol. 41(4), pages 547-564, November.
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    More about this item


    Profits cycle; earnings; growth rate; P/E ratio; earnings accumulation; Fed's model; CRB Spot Index; 10-Y Treasury bond yield;

    JEL classification:

    • G - Financial Economics

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