Javier Estrada’s latest research, Expected Stock Returns in Bullish Times, shines a spotlight on the mathematical drivers of stock returns — and why today’s market exuberance should be met with caution. By analyzing more than 150 years (1872–2024) of U.S. market data, Estrada decomposes annual returns into their primary sources: dividend yield, earnings growth, and price/earnings ratio movements. His findings reveal why the conditions for continued outsized gains rarely persist for long, especially after strong bull runs.
Estrada’s review shows that periods of rapid earnings growth rarely coincide with the simultaneous expansion of P/E multiples. In fact, these two have been negatively correlated over decade-long periods (negative –0.5 correlation), meaning that when profits grow quickly, investors don’t also bid up valuations, and vice versa. This relationship becomes critical when markets reach extreme valuations, as seen in both the late 1990s and to
