Two Competing Views of Equity Returns

A recent debate in the Financial Times highlights the fundamental divide between two perspectives on how equity returns behave. One school of thought sees equity markets as following a random walk with an upward drift, meaning that past performance does not predict future returns but has historically trended upwards. This view is supported by figures such as Zwi Bodie and John Ralfe.

The opposing perspective suggests that equity markets exhibit mean reversion, where prices tend to return to a stable long-term trend. Proponents of this view, such as Andrew Smithers, argue that stock markets operate within an economic equilibrium, and deviations from this trend eventually correct themselves.