Since expected inflation for 20 is elevated in most economies, expected real dividends have mostly declined. As of early August, expected nominal dividends for 2022 have increased or are about unchanged, while expected nominal dividends for 2023 have modestly declined on balance. Expected dividends in the euro area suffered the largest declines, consistent with the euro area's greater exposure to the conflict. Following Russia's invasion of Ukraine on February 24th, expected dividends fell significantly but recovered most of their losses soon thereafter. 2įigure 1 plots expected nominal dividends for 20 across advanced economies since the start of this year together with the corresponding broad equity indexes. As these measures rely on the prices of index options, which are not actively traded for maturities longer than two years, we focus our analysis on expected dividends for 20 only. To isolate the expected dividend component of dividend futures, we follow Martin (2017) and construct empirical measures of equity risk premiums. However, in contrast to equity prices, which reflect expectations about dividends and risk premiums decades ahead, dividend futures reflect near-term expectations (see, e.g., Chen, Ibert, Vazquez-Grande 2020). Similar to equity prices, dividend futures prices reflect both expectations about future dividends and equity risk premiums. We infer dividend growth expectations using dividend futures prices for the S&P 500 (the United States), the EuroStoxx 50 (the euro area), the FTSE 100 (the United Kingdom), and the Nikkei 225 (Japan). Extracting Dividend Expectations from Dividend Futures Moreover, equity markets do not unequivocally price in a contraction in economic activity as of late June. We conclude that the declines in equity prices since the beginning of the year have been mostly driven by a revaluation of far-dated cash flows through a higher discount rate as opposed to changes in cash-flow expectations.
In turn, these changes in expected dividends translate into moderate downward revisions to expected real GDP growth for this year and the next. We document that, since the beginning of the year, expected dividends implied by dividend futures are about unchanged for 2022 and have modestly declined for 2023. As argued by the academic literature (see, e.g., Gormsen and Koijen 2020), these future contracts can be used to infer market-implied estimates of expected dividend and GDP growth. Given their significant declines, do equity prices now reflect the risks of an economic contraction? To shed light on this question, in this note we use dividend futures prices to derive high frequency market-implied growth expectations for 20 for four major advanced economies.ĭividend futures are claims to the dividends paid out by an equity index (e.g., the S&P 500 index) in a given year. In interpreting the declines, market commentaries have highlighted the risks to the economic outlook in the United States and other advanced economies. Since the beginning of this year, broad equity price indexes around the world have declined significantly. Markus Ibert, Ben Knox, and Francisco Vazquez-Grande Factors Affecting Reserve Balances - H.4.1ĪugAre Stocks Pricing in Recession Risks? Evidence from Dividend Futures 1.Industrial Production and Capacity Utilization - G.17.Survey of Household Economics and Decisionmaking.Household Debt Service and Financial Obligations Ratios.Financial Accounts of the United States - Z.1.Statistics Reported by Banks and Other Financial Firms in the.Senior Credit Officer Opinion Survey on Dealer Financing.New Security Issues, State and Local Governments.Senior Loan Officer Opinion Survey on Bank Lending.Charge-Off and Delinquency Rates on Loans and Leases at.Assets and Liabilities of Commercial Banks in the U.S.Aggregate Reserves of Depository Institutions and the.Payments System Policy Advisory Committee.International Standards for Financial Market.Supervision & Oversight of Financial Market.Sponsorship for Priority Telecommunication Servicesįinancial Market Utilities & Infrastructures.Federal Reserve's Key Policies for the Provision of Financial.Regulation HH (Financial Market Utilities).Regulation II (Debit Card Interchange Fees and Routing).Regulation CC (Availability of Funds and Collection of.Securities Underwriting & Dealing Subsidiaries.Enforcement Actions & Legal Developments.