Reconciling Macroeconomics and Finance for the U.S. Corporate Sector: 1929 to Present

We examine how to quantitatively reconcile the high volatility of market valuations of U.S. corporations with the relative stability of macroeconomic quantities since 1929. Macroeconomic and financial variables are measured in a consistent fashion using the Integrated Macroeconomic Accounts (IMA) of the United States. We first use a finance- style valuation model that builds on Campbell and Shiller (1987) to interpret fluctuations in the market value of U.S. corporations from 1929 to 2023, using these IMA data. We find that fluctuations in expected cash flows to firm owners have been the dominant driver of those fluctuations in value; fluctuations in expected rates of return have played a smaller role. We then develop a stochastic growth model, extended to incorporate factorless income, which we use to decompose corporate cash flows and associated valuations into income and value due to physical capital and factorless income. Finally, we ask whether expected returns to investing in capital in our macroeconomic model are consistent with the series for expected returns estimated from our finance-style valuation model. We find that they are. In this sense, we reconcile volatile market valuations and stable capital output ratios.