Price Primarily Predicts Future Returns, Not Future Earnings Growth

Investors should look beyond growth forecasts, study suggests

A central question in equity valuation is, why do stock valuation ratios (like price/earnings) differ so widely across companies?

Ricardo Delao, Xiao Han, and Sean Myers, authors of "The Return of Return Dominance: Decomposing the Cross-Section of Prices," which was published in the July 2025 Journal of Financial Economics, set out to find the answer.

Their research rigorously tested whether these differences are primarily driven by expectations of future returns or by expectations of future earnings growth. Their analysis covered all US common stocks listed on the New York Stock Exchange, American Stock Exchange, and Nasdaq over the period 1963-2020. They conducted their analysis at both the portfolio and individual firm level and also evaluated how well six leading models of the value premium (the tendency of value stocks to outperform growth stocks) explained their findings.

You can read the rest of my latest Morningstar column here.