Reconciling Macroeconomics and Finance for the U.S. Corporate Sector: 1929 - Present

We examine how to reconcile, quantitatively, the high volatility of market valuations of U.S. corporations with the relative stability of macroeconomic quantities over the period 1929-present. We use a stochastic growth model extended to incorporate factorless income as a measurement framework to investigate this apparent tension. Macroeconomic and financial variables are measured in a consistent fashion using the Integrated Macroeconomic Accounts of the United States, which offer a unified data set for the income statement, cash flows, and balance sheet of the U.S. Corporate Sector. We argue that fluctuations in expected cash flows to firm owners have been the dominant driver of fluctuations in the market value of U.S. corporation. We show that relatively modest shocks to expected future cash flows can account for the history of corporate valuations from 1929 to 2023, without appealing to fluctuations in discount rates. Further evidence in support of this hypothesis is that payout-price ratios in our data do in fact forecast growth of future cash flows to owners of firms. In particular, they forecast changes in the fraction of corporate output flowing to owners of firms. The time path for the after-tax return to investment in capital that we infer from our model tracks the risk free interest rate fairly closely, at least in the period after World War II. In this sense, our model offers a reconciliation of volatile market valuations and stable capital output ratios.