“Fundamentals — corporate earnings, profit margins and gross domestic product (GDP) growth — are supposed to be the ultimate guide for judging stock values and predicting the stock market’s direction.
But those fundamentals are useless when it comes to forecasting stock market trends, a Vanguard study concludes.
“We’re not saying fundamental factors don’t matter,” Roger Aliaga-Diaz, a study co-author and Vanguard senior economist, told CNNMoney.
The problem is that there are many other factors influencing stocks.
Vanguard economists examined the stock market going back to 1926 to reach their conclusion. Even the recent past shows the disconnection. Stocks jumped 16 percent last year, while corporate profits were up just 3 percent. European stocks surged 20 percent, while Europe was stuck a deep recession.
Earnings forecasts aren’t much help either, CNNMoney noted. Analysts are generally too optimistic, and their predictions are already priced into stocks anyway. Plus, they exhibit herd-like behavior, not wanting to be different from their forecasting peers.
Vanguard determined that the Shiller price-earnings (P/E) ratio, which uses average earnings over 10 years, is the best fundamental yardstick for predicting stocks, according to CNNMoney. That measurement currently predicts modest returns.
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