Earnings Extrapolation and Predictable Stock Market Returns

Hongye Guo

The Review of Financial Studies, 2025, vol. 38, issue 6, 1730-1782

Abstract: The U.S. stock market’s return during the first month of a quarter correlates strongly with returns in future months, but the correlation is negative if the future month is the first month of a quarter, and positive if it isn’t. These correlations offset, consistent with the well-known near-zero unconditional autocorrelation, yet they are pervasive, present across industries and countries. The pattern accords with a model in which investors extrapolate announced earnings to predict future earnings, not recognizing that earnings in the first month of a quarter are discretely less predictable than in prior months. Survey data support the model.

Keywords: G12; G14; G40 (search for similar items in EconPapers)
Date: 2025
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