Macro vs. Micro Earnings, 'Macro-Earnings Negativity', and an Introduction to a Composite Valuation Model

Abstract

Earnings of the overall market are typically viewed in the same perspective as earnings of individual companies. Conflicts between these perceptions are revealed with the use of Kalecki’s profit function to reveal the identification of negative characteristics with macro earnings, introduce the concept of “macro-earnings negativity”, and demonstrate the theoretical and statistical superiority of MV/GDP valuation measure versus earnings-based measures. Based on the MV/GDP metric, a multi-variable forecasting model is developed which utilizes both new and prior-researched variables, the most effective of which is a demographic measure. The resulting composite model is statistically superior to popular metrics, and, relative to popular benchmarks, forecasts considerably lower returns for the coming decade.