Time varying stock return predictability: Evidence from US sectors

► We conjecture that stock return predictability is time-varying and linked to the business cycle. ► Using monthly data for twelve US sector portfolios, we estimate 5-year rolling fixed window predictive regressions. ► The series of time varying predictive coefficients are regressed on output growth and a recession dummy. ► Results for the dividend yield strongly support a negative relationship between predictability and output growth. ► Predictability of stock returns is stronger during contractionary periods.