Does duration of competitive advantage drive long-term returns in the stock market?

Juan A. Forsyth, Samuel Mongrut

Research output: Contribution to journalArticle in a journalpeer-review

1 Scopus citations


The purpose of this article was to develop a new indicator to estimate the aggregate long-term expected return on stocks. There is not a widely used method to model directly the aggregated expected return of the stock market. Most current methods use indirect approaches. We developed a new indicator that does not need an econometric model to generate expected returns and provides an estimate of the long-term expected returns. The proposed methodology can be used to develop an indicator of future returns of the stock market similar to the yield-to-maturity used for bonds. We used a restricted one-stage constant-growth model - a variant of the residual income model (RIM) - whose main input is the duration of companies’ competitive advantage and cyclical adjusted real return on invested capital (ROIC) with a 10-year average. We used a new methodology to develop an indicator of the long-term expected return on the equity market at the aggregate level, considering the duration of the competitive advantage of companies. Our results showed a strong correlation between the estimated implied return on equity (IRE) of current stock prices and realized returns of the 10-year real total return of the index.
Original languageEnglish
Pages (from-to)329-342
Number of pages14
JournalRevista Contabilidade & Finanças
Issue number89
StatePublished - May 2022

Bibliographical note

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  • Stock market
  • Return on equity
  • Implied cost of capital
  • Long-term returns
  • Competitive advantage


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