"Rational Pessimism: Predicting Equity Returns by Tobin's q and Price/Earnings Ratios"


Journal Article (Academic article)

In the spring of 2000, two books predicted a substantial fall in the S&P500 Index. Robert Shiller’s Irrational Exuberance found that, historically, a high price earnings ratio, with real earnings averaged over 10 years, accurately predicts a low real rate of return from investing in the S&P500 Index. Smithers and Wright’s Valuing Wall Street found that a high Tobin’s q for the non- financial equities in the S&P500 does the same. We discover that q beats all variants of the PE ratio for predicting real rates of return over alternative horizons. We also formalize the feedback mechanisms considered in both books.

Duke Authors

Cited Authors

  • Harney, M; Tower, E

Published Date

  • October 1, 2003

Published In

  • The Journal of Investing

Volume / Issue

  • 12 / 2

Start / End Page

  • 58 - 69