Carabias Palmeiro, J. & Abdalla, A. (2026). The dynamic effects of aggregate demand and supply disturbances on the aggregate earnings returns relation. Accounting Review, [In Press]

Using an aggregate demand and supply framework, we provide novel insights on the dynamic nature of the aggregate earnings-returns relation. Demand shocks could have positive or negative effects on returns, depending on whether they originate from shifts in monetary policy or consumer spending, whereas supply shocks have positive effects. During the pre-2000 period, aggregate earnings are dominated by consumer demand shocks, which explains why the aggregate earnings-returns relation is negative. During the post-2000 period, aggregate earnings are dominated by supply shocks, which explains the switch in the sign of the earnings-returns relation from negative to positive. Evidence suggests capital accumulation and productivity, linked to the Information, Communications, and Technology era, as a mechanism for the post-2000 increasing (decreasing) dominance of supply (demand) effects in earnings. Our paper, which helps reconcile various stylized facts, contributes by identifying economic sources of variation in aggregate earnings that drive variation in aggregate returns.