The Impressive Markets Hypothesis: Prices (Still) Forecast Fundamentals

Despite concerns about reduced market efficiency due to social media herding and information overload, stock prices still contain substantial information about future company fundamentals. Using data from over 3,000 US equities annually between 2004 and 2024, the authors find that market valuations reliably predict future cash flows and continue to do so even when value spreads are wide. A detailed analysis shows that market prices have become better at forecasting revenues but weaker at forecasting margins. The results reinforce the enduring informational power of market prices and suggest that cost-side modeling offers new opportunities for active investors.