Aggregate expected investment growth and stock market returns

A bottom-up measure of aggregate investment plans, namely, aggregate expected investment growth (AEIG) can negatively predict market returns. At the one-year horizon, the adjusted in-sample R-2 is 18.2% and the out-of-sample R-2 is 14.4%. The return predictive power is robust after controlling for standard macroeconomic return predictors and proxies for investor sentiment. Further analyses suggest that the predictive ability of AEIG is at least partially driven by the time-varying risk premium. These findings lend support to neoclassical models with investment lags. (C) 2020 Elsevier B.V. All rights reserved.