Stock Prices, Expected Returns, and Inflation

摘要

This paper examines the effect of expected inflation on stock prices and expected211u001elong-run returns. Ex ante estimates of expected long-run returns are derived by 211u001eincorporating estimates of investor expectations of future corporate cash flows 211u001einto a variant of the Campbell-Shiller dividend-price ratio model. In this model, 211u001ethe log earnings-price ratio is expressed as a linear function of expected future 211u001ereturns, expected earnings growth rates, and the log of the current dividend-211u001epayout ratio. Investor expectations of earnings growth are inferred from equity 211u001eanalysts' earnings forecasts; inflation expectations are drawn from surveys of 211u001eprofessional forecasters. I find that the negative relation between equity 211u001evaluations and expected inflation is the result of two effects: a rise in 211u001eexpected inflation coincides with both (i) lower expected real earnings growth 211u001eand (ii) higher required real returns. The earnings channel is not merely a 211u001ereflection of inflation's recession-signaling properties; rather, a substantial 211u001eportion of the negative valuation effect appears to be the result of a negative 211u001erelation between expected long-term inflation and projections of long-term real 211u001eearnings growth.