Macroeconomic News-flow, Earnings Expectations and Return Predictability

By constructing a stylised calendar of monthly macroeconomic releases, I analyse the usefulness of the real-time macroeconomic news-flow as a leading indicator for firm-level end-of-quarter realised earnings. I find that the macroeconomic news-flow strongly anticipates end-of-quarter earnings. However, consistent with investors’ inefficient use of macroeconomic news, I show in earnings announcements pricing tests that the macroeconomic news is not incorporated into market earnings expectations. Using a calendar-time portfolio approach, I subsequently show that this market failure is pervasive through the fiscal quarter and translates into monthly stock return predictability. A long-short trading strategy that exploits this predictable pattern yields monthly alphas of around 111 basis points.

This seminar is organised by the Erasmus Accounting Research Group.