Why People Disagree About What Drives Stock Prices

How much of stock-price variation reflects movements in fundamental value, as defined by Shiller (1981), rather than in expected returns? To a first-order approximation, the answer depends only on forecasts of expected returns: researchers using different cashflow and value measures disagree only because different cash-flow-to-value ratios imply different return forecasts. Quantifying the predictability of cash-flow growth does not help answer Shiller’s question. Valuations are driven primarily by expected cash flows unless expected returns vary substantially over very long horizons. Whether they do cannot be precisely identified from a century of annual data.