Using the Supply-Side Approach to Understand and Estimate Equity Returns

Abstract

A supply-side analysis of the average stock returns over 1926-2004 helps us see how components that include real earnings growth and the price-earnings ratio have contributed to the average total return. The long-run sustainable average equity return can be expressed as a benchmark expected equity return. An innovation is that investors can use a supply-side model as a disciplined framework for estimating average equity returns over much shorter periods than the 80-year sample analyzed.

TOPICS: Quantitative methods, equity portfolio management, security analysis and valuation