Predicting Equity Returns for 37 Countries: Tweaking the Gordon Formula

Recently, there has been a lot of discussion about whether and how much the U.S. stock market is overvalued, leading some economic gurus to suggest that foreign markets may be good investments. We ask whether this is the case and apply the Gordon formula to predict future real rates of return on three Morgan Stanley Capital International indices and 37 individual country indices. Our conclusion is that, as a whole, foreign markets do indeed promise significantly higher future returns than the U.S. market does, suggesting that an increased focus on international diversification by investors and fund managers could be beneficial.