Momentum a Proxy for Earnings Growth?

Is momentum a rational firm earnings growth proxy rather than a manifestation of investor underreaction/overreaction to news? In their August 2024 paper entitled “A Unified Framework for Value and Momentum”, Jacob Boudoukh, Tobias Moskowitz, Matthew Richardson and Lei Xie present an asset pricing model that treats value and momentum as complementary inputs to a present value of earnings estimate. They view momentum, return from 12 months ago to one month ago, as a noisy proxy for earnings growth. They test this view by relating momentum retrospectively to actual earnings growth. They further construct an asset pricing model based on a single growth-adjusted value factor and compare its effectiveness to that of the widely used 4-factor (market, size, book-to-market, momentum) model. They calculate growth-adjusted value factor returns via monthly, 5-year smoothed bivariate value-growth regressions, with three alternatives for earnings growth adjustment: (1) momentum as a proxy for growth; (2) a combination of momentum and analyst earnings forecasts as a proxy for growth; and, (3) retrospective actual earnings. They focus on individual U.S. stocks, but also look at U.S. industries, stocks across 23 developed equity markets and Japanese stocks. Using monthly book-to-market ratios, stock returns, next-year earnings growth forecasts and actual annual earnings as available for Russell 3000 stocks since the end of March 1984, for stocks in 23 developed country markets since the end of January 1989 and for stocks in the MSCI Japan Index since the end of August 1988, all through December 2019, they find that:

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