Forecasting stock returns : What signals matter , and what do they say now ?

Executive summary. Some say the long-run outlook for U.S. stocks is poor (even " dead ") given the backdrop of muted economic growth, already-high profit margins, elevated government debt levels, and low interest rates. Others take a rosier view, citing attractive valuations and a wide spread between stock earnings yields and Treasury bond yields as reason to anticipate U.S. stock returns of 8%–10% annually, close to the historical average, over the next decade. Given such disparate views, which factors should investors consider when formulating expectations for stock returns? And today, what do those factors suggest is a reasonable range to expect for stock returns going forward? We expand on previous Vanguard research in using U.S. stock returns since 1926 to assess the predictive power of more than a dozen metrics that investors would know ahead of time. We find that many commonly cited signals have had very weak and erratic correlations with actual subsequent returns, even at long investment horizons. These poor