Equity markets and the real economy

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The analysis explores how investors' macroeconomic expectations influence the U.S. equity market, addressing three key issues. First, it examines whether investors' equity risk premia expectations are affected by overall business conditions, highlighting the significance of economic conditions as a crucial factor in stock market valuation. Understanding the impact of the real economic situation on equity risk premia expectations is vital for investors when planning asset allocation and trading strategies. Next, the inquiry shifts to whether changes in stock values are driven by fluctuations in economic conditions. Grasping how investors' expectations regarding stock value drivers respond to real macroeconomic news is essential for research on market efficiency and information processing. This question is pivotal, as the foundational assumption of asset pricing models is an information-efficient market. Lastly, the analysis directly considers investors' economic expectations, questioning whether traditional business cycle classifications accurately reflect market participants' real-time expectations and their effect on stock values. The findings indicate that turning point signals from the U.S. Leading Economic Index provide a better explanation of stock market patterns than NBER turning points. Overall, the examination reveals a much stronger link between business conditions, investors' macroeconomic expectations, and equit