The most reliable predictors of long-term equity returns across sectors are combinations of book-to-market ratios, normalized earnings yields, and enterprise-value based multiples, used with sector-aware adjustments. Research shows each captures different drivers: book-to-market reflects relative cheapness in accounting terms, CAPE (cyclically adjusted price-to-earnings) smooths earnings cyclicality, and EV/EBITDA controls for capital structure and investment intensity.
Evidence from research
Kenneth French at Dartmouth College and Eugene F. Fama at the University of Chicago demonstrated that high book-to-market firms historically produce higher average returns, framing the enduring value premium. Robert Shiller at Yale University popularized the cyclically adjusted price-to-earnings ratio as a predictor of long-horizon market returns by averaging profit cycles to reduce transitory noise. Aswath Damodaran at NYU Stern School of Business argues for enterprise-value measures such as EV/EBITDA when comparing firms across sectors because they account for leverage and differences in fixed capital. Cliff Asness at AQR Capital Management has reinforced that valuation-based signals retain explanatory power even after accounting for multiple factors.
Practical considerations
Causes for predictive power include mean reversionmisleading comparator for those sectors. Conversely, capital-intensive utilities or industrials are better compared with EV/EBITDA or price-to-sales adjusted for asset turnover.
Accounting standards and territorial factors matter: IFRS and US GAAP treat capitalization and impairment differently, which shifts book values and earnings patterns across countries and cultures. Environmental transition and regulatory regimes can permanently alter sector profitability, so historical multiples must be interpreted with contextual knowledge.
In practice, combine signals: use book-to-market for cross-sectional value identification, CAPE for long-horizon aggregate market guidance, and EV/EBITDA for cross-sector comparisons after normalizing earnings and adjusting for intangibles, leverage, and local accounting. Treat multiples as screening tools that should be supplemented by cash-flow based valuation and qualitative assessment of sector dynamics.