Abstract
This paper provides novel evidence of
the time-varying roles of subjective
expectations in explaining stock price
variations. Cash flow expectations
matter more during times of financial
uncertainty and recessions, especially
among the hardest-hit industries such
as Telecommunications during the
dot-com bubble, Financials during the
Great Recession, and Healthcare during
the COVID-19 pandemic.
Conversely, discount rates explain
more price variations during expansionary
periods. Inflation expectations,
while accounting for more than
half of price fluctuations in high-inflation
environments, play a negligible
role otherwise. Finally, factor returns
tend to move against earnings growth
expectations under low financial
uncertainty but move in sync with
earnings growth expectations when
financial uncertainty is high.