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The Present Value of Corporate Profits: A Forecasters' Survey Perspective

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  • Michal Andrle

Abstract

This paper presents and discusses the estimates of the present value of corporate profits in the United States from 1984 to 2018. To value the expected income stream, it uses the long-range forecasts of professional forecasters for pre-tax corporate earnings and long-term Treasury note yields, sourced from the Blue Chip Economic Indicators survey. The appraised value of corporate earnings can point in real time at periods where market prices are deviating from valuations implied by expected earnings and interest rates. Market participants' forecasts seem to interpret most of the earnings fluctuations as permanent, underestimating the cyclical fluctuations The over-reaction to transitory shocks and changes in long-term outlook leads to swings in the valuation, in line with swings in the observed market prices.

Suggested Citation

  • Michal Andrle, 2019. "The Present Value of Corporate Profits: A Forecasters' Survey Perspective," IMF Working Papers 2019/012, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2019/012
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    File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=46467
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    References listed on IDEAS

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    1. John Y. Campbell, 2007. "Estimating the Equity Premium," NBER Working Papers 13423, National Bureau of Economic Research, Inc.
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    3. Abel, Andrew B & Blanchard, Olivier J, 1986. "The Present Value of Profits and Cyclical Movements in Investment," Econometrica, Econometric Society, vol. 54(2), pages 249-273, March.
    4. John Y. Campbell, Robert J. Shiller, 1988. "The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors," The Review of Financial Studies, Society for Financial Studies, vol. 1(3), pages 195-228.
    5. 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.
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    Cited by:

    1. Martin Casta, 2021. "Deriving Equity Risk Premium Using Dividend Futures," Working Papers 2021/1, Czech National Bank.

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