Earnings News, Expected Earnings and Aggregate Stock Returns

The relation between aggregate earnings and aggregate returns is complex and not fully understood. For example, in contrast to firm-level relations, prior literature finds aggregate earnings changes and aggregate stock returns are negatively related. This paper constructs new measures of aggregate earnings news based on revisions in analyst forecasts. The results show that aggregate earnings news is positively related to contemporaneous stock returns. The results also show that aggregate stock returns are positively related to unexpected aggregate forecast errors, and negatively associated with expected aggregate earnings growth. Taken together, these findings suggest that expected earnings are negatively related to expected returns and unexpected earnings surprises are positively related to changes in expected cash flows.