Predictable EPS growth and the performance of value investing

Richard G. Sloan () and Annika Yu Wang ()
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Richard G. Sloan: University of Southern California
Annika Yu Wang: Bauer College of Business, University of Houston

Review of Accounting Studies, 2025, vol. 30, issue 1, No 2, 33-78

Abstract: Abstract Previous research finds that EPS growth rates are difficult to predict and reasons that much of the observed cross-sectional variation in valuation ratios is due to variation in implied future stock returns. Yet the observed cross-sectional relation between valuation ratios and realized future stock returns is weak. We revisit these findings using a refined measure of expected EPS growth rates and document robust evidence of predictability in EPS growth rates. Moreover, we find that this predictable growth extends beyond two years into the future and is strongly reflected in observed valuation ratios. We show that combining valuation ratios with our refined measure of expected EPS growth rates improves forecasts of stock returns, though return predictability remains weak. Thus, we conclude that most of the variation in valuation ratios is driven by predictable EPS growth.

Keywords: Earnings; Growth; Value; Analyst forecasts (search for similar items in EconPapers)
JEL-codes: C23 D21 G32 M41 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s11142-023-09812-6

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