FYI: Academic research has found that valuation metrics, such as the earnings yield (E/P) or the CAPE 10 earnings yield, and valuation spreads have information in terms of future returns—the higher the earnings yield, the higher the expected return; and the larger the spread in valuations between growth and value stocks, the larger the future value premium is likely to be. What’s more, this relationship holds across asset classes, not just stocks.
This relationship should be expected, as the cross-sectional book-to-market spread is a proxy for the price of risk. When the price of risk increases, the cross-sectional spread in risk premiums (and consequently, book-to-market) widens, and the expected premiums to factors such as market beta, size and value also increase.
Regards,
Ted
https://www.etf.com/sections/index-investor-corner/swedroe-time-varying-factor-premiums
