Consumption Anchors Stock Prices

Carlo A. Favero, Alessandro Melone, Sean Myers, Andrea Tamoni

No 26287, BAFFI CAREFIN Working Papers from BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy

Abstract: Aggregate stock prices and aggregate consumption share a common stochastic trend. We estimate this long-run relation in real time and recover a price–consumption cycle that captures transitory deviations of stock prices from their consumption-implied value. These deviations mean-revert over business-cycle horizons and predict future returns on the aggregate market and characteristics sorted portfolios, both in- and out-of-sample, from one quarter to two years ahead. The cycle does not forecast consumption growth, but contains information about future dividend growth, and its return-predictive power disappears when consumption is excluded from the long-run relation. A simple model with permanent and transitory consumption shocks rationalizes these findings. The evidence identifies consumption as a macroeconomic anchor for asset prices and departures from this anchor as a source of time-varying expected returns.

Keywords: Consumption Levels; Cointegration; Time-Varying Equity Premium; Return Predictability (search for similar items in EconPapers)
JEL-codes: C22 E32 E44 G12 (search for similar items in EconPapers)
Pages: 64
Date: 2026
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