What drives the volatility of professional stock return forecasts? Causal evidence from macro shocks

Consensus professional stock return forecasts are three times more volatile than those of non-professionals and econometricians. We show that this difference reflects professionals’ strong countercyclical responses to macro shocks, which explain 20–40% of forecast variation and are consistent with rational asset pricing models in which discount rates rise in bad times. We use macro shocks to identify the discount-rate component of professional forecasts and find that it closely matches realized returns. We conclude that professionals’ assessment of the discount-rate impact of macro shocks distinguishes them from other forecasts, challenging existing models of expectation formation.