The claim that the market is good at predicting future earnings.
It probably is, but economics does not yet have the empirical grounding to give me high confidence in its theories (the way I would be for fields like physics or chemistry; I still think economic theory has a strongly positive correlation with reality).
The claim that the market is good at predicting future earnings.
This is conceptually very easy to test; get historical stock price and earnings data, compute P/E ratios at each snapshot, compute earnings growth across snapshots, and then look at the relationship between the two. Vanguard ran the numbers here (page 7), and two ways of calculating the P/E ratio were the strongest two factors. (As one would expect, 1-year returns were very difficult to predict at all, and they were mostly useful for 10-year returns.)
This thread is for asking any questions that might seem obvious, tangential, silly or what-have-you. Don't be shy, everyone has holes in their knowledge, though the fewer and the smaller we can make them, the better.
Please be respectful of other people's admitting ignorance and don't mock them for it, as they're doing a noble thing.
To any future monthly posters of SQ threads, please remember to add the "stupid_questions" tag.