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

IMF Working Papers, January 16, 2019

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

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Bibliographic details

• Authors: Michal Andrle
• Published: January 16, 2019
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781484390047.001

Summary

• Presents and discusses estimates of the present value of corporate profits in the United States from 1984 to 2018.
• Uses long-range forecasts of professional forecasters for pre-tax corporate earnings and long-term Treasury note yields from the Blue Chip Economic Indicators survey to value the expected income stream.
• Argues that the appraised value of corporate earnings can indicate in real time periods where market prices deviate from valuations implied by expected earnings and interest rates.
• Finds that market participants' forecasts tend to interpret most earnings fluctuations as permanent, underestimating cyclical fluctuations; over-reaction to transitory shocks and changes in long-term outlook leads to swings in valuation that align with swings in observed market prices.

Methodology

• Data sources: Blue Chip Economic Indicators survey forecasts for pre-tax corporate earnings and long-term Treasury note yields.
• Valuation approach: Present-value computation of expected period-by-period earnings using the forecasts and long-term interest rates.

Key findings and interpretations

• Time coverage: 1984 to 2018.
• Market participants’ forecasts:
  • Largely interpret earnings fluctuations as permanent rather than cyclical.
  • Underestimate cyclical fluctuations in earnings.
• Valuation dynamics:
  • Over-reaction to transitory shocks and revisions in the long-term outlook produce swings in the present-value appraisal.
  • These swings are in line with observed movements in market prices, implying that forecasts contribute to valuation volatility.

Subjects and keywords

• Subjects: Asset prices, Financial institutions, Financial services, Labor, Long term interest rates, National accounts, Prices, Return on investment, Stocks, Wages
• Keywords: asset prices, corporate earnings, earnings, earnings outlook, equity risk premium, growth expectation, interest rate, Long term interest rates, period-by-period earnings, present value, present-value computation, profit growth, rate of return, Return on investment, risk premium, Stocks, value investor, Wages, WP

IMF Working Paper No. 2019/012 by Michal Andrle.

Content in this bundle

• The Present Value of Corporate Profits: A Forecasters’ Survey Perspective, WP/19/12, January 2019
  • The Present Value of Corporate Profits: A Forecasters’ Survey Perspective, WP/19/12, January 2019 (Markdown version)
  • The Present Value of Corporate Profits: A Forecasters’ Survey Perspective, WP/19/12, January 2019 (PDF)