Dec 11, 2008
Do valuation measures such as price/earnings or price/dividend ratios help predict future returns? Are they telling us anything now?

EFF/KRF: Yes, but not with lots of confidence. The market return tends to be lower when aggregate ratios like E/P and D/P are low, and vice versa. The economic logic is based on the same discount rate effect we use to explain the higher expected return on value stocks. The empirical evidence leans toward a positive relation between aggregate fundamental to price ratios and future market returns, but there is lots of uncertainty about the forecast.

Eugene F. Fama
The Robert R. McCormick Distinguished Service Professor of Finance at the University of Chicago Booth School of Business
Kenneth R. French
The Roth Family Distinguished Professor of Finance at the Tuck School of Business at Dartmouth College
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Eugene Fama and Ken French are members of the Board of Directors of the general partner of, and provide consulting services to Dimensional Fund Advisors LP.