EARNINGS AND EXPECTED RETURNS

The aggregate dividend payout ratio forecasts excess returns on both s tocks and corporate bonds in postwar U.S. data. High dividends forecas t high returns. High earnings forecast low returns. The correlation of earnings with business conditions gives them predictive power for ret urns; they contain information about future returns that is not captur ed by other variables. Dividends and earnings contribute substantial e xplanatory power at short horizons. For forecasting long-horizon retur ns, however, only (scaled) stock prices matter. Forecasts of low long- horizon stock returns in the mid-1990s are caused not by earnings or d ividends, but by high stock prices.