Equity duration: why stock-picking got harder after 1945

A new study shows how a shift in equity duration after 1945 reshaped stock markets. It explains why dividend growth stopped being predictable, why stock-picking became harder, and why evidence-based investors are right to stick with low-cost index funds.

For centuries, dividends were a reliable guide to market behaviour. From the early days of the Amsterdam exchange in the 1600s until the middle of the 20th century, dividend growth and expected returns each explained a meaningful share of price movements. Investors could track payouts to make sense of markets.

That changed after the Second World War. As equity duration lengthened — with firms retaining more earnings and paying out less in dividends — the link between dividends and prices weakened. Markets became dominated by changes in expected returns rather than growth in payouts, making stock-picking a far tougher game.

The puzzle for economists was why this happened. Why did dividend growth lose its predictive power just as markets became more sophisticated and investors better diversified? For decades, no clear explanation emerged.

Benjamin Golez of the University of Notre Dame and Peter Koudijs of New York University set out to solve it. Their research, updated in 2025, shows that the answer lies not in mass psychology but in corporate behaviour. By retaining more of their earnings and paying out less, companies increased equity duration. That structural shift altered what drives stock prices — and it still shapes how markets behave today.

You can see the change clearly in the chart below, which shows how corporate payout ratios fell steadily in the decades after 1945. Before the war, firms typically paid out most of their earnings as dividends. Since then, payouts have shrunk to less than half of earnings.

The paper shows how corporate payout ratios have steadily fallen since the mid-20th century, lengthening equity duration and shifting the focus of markets from dividends to expected returns.

How equity duration reshaped markets

The consequence is a longer equity duration. In simple terms, investors are waiting longer to receive their returns. That makes markets more sensitive to discount rates — the rate at which future cash flows are valued today — and less sensitive to near-term dividend growth.

The chart above illustrates this point. Before 1945, dividend growth and expected returns were roughly balanced in explaining market movements. Since the war, expected returns have accounted for almost all of the variation in stock prices. Dividend growth has played a minimal role.

Before 1945, dividend growth explained much of the variation in stock prices. The authors demonstrate how, since then, expected returns have dominated, making stock-picking far harder.

The researchers confirmed this finding across multiple datasets. Using dividend strips — claims on specific future dividend payments — they showed that short-duration claims are still influenced by dividend growth, while long-duration equity claims are almost entirely driven by expected returns. Looking across centuries of aggregate market data, they found the same pattern: dividend growth mattered in earlier periods but has lost significance in the modern era.

Lessons from today’s companies

The effect is not just historical. It can be seen across today’s listed companies. By sorting firms into portfolios based on their payout ratios, the researchers showed that companies with high payouts (shorter duration) are still somewhat influenced by dividend growth. But for companies that reinvest more heavily (longer duration), expected returns account for nearly all the variation in stock prices.

The next chart makes the point. As payout ratios rise, the role of expected returns falls. The relationship is strong and consistent.

Golez and Koudijs show how corporate payout ratios rose gradually from about 70% in 1880 to more than 80% by 1940, before falling sharply in the post-war decades to around 40% today.

In other words, duration matters. When companies hold on to more of their profits, their share prices depend more on how markets value the distant future. And that makes stock-picking harder.

Why this matters for investors

For individual investors, the lesson is clear. The old idea that careful analysis of dividend growth could help identify winning stocks no longer holds. Today’s markets are shaped primarily by changes in expected returns, which reflect broad market dynamics rather than company-specific fundamentals.

This helps explain why so many active fund managers underperform their benchmarks. Regular reports by S&P Dow Jones Indices show that the majority of active funds fail to beat the market over five, ten, and fifteen years. The structural headwinds identified by Golez and Koudijs provide a powerful explanation: when discount rates drive markets, no amount of stock-picking skill can reliably overcome them.

It also highlights the importance of diversification. No single company, however well managed, can insulate an investor from shifts in discount rates that affect the whole market. Holding a broad portfolio through low-cost index funds remains the most effective way to manage risk and capture returns.

Evidence-based investing and equity duration

The study provides fresh support for evidence-based investing. It shows that markets are not irrational or incomprehensible; they are responding rationally to changes in corporate behaviour. As firms reinvest more and pay out less, markets naturally place more weight on expected returns.

This reinforces the case for strategies based on long-term evidence rather than short-term speculation. Owning broad index funds, diversifying across markets and asset classes, and keeping costs low are all consistent with the insights of this research.

If the evidence is so strong, why do investors persist in trying to pick stocks? Behavioural finance offers an answer. Humans are prone to overconfidence, believing they can outsmart the market. We are also drawn to stories of exceptional companies and star fund managers, even when statistics show that very few sustain outperformance.

Another factor is the discomfort of accepting that success often comes from doing less, not more. Evidence-based investing can feel boring compared with the excitement of betting on the next big winner. Yet the data is clear: patient, disciplined strategies consistently outperform more speculative approaches over time.

For advisers and individual investors alike, the research offers several practical lessons:

• Diversify widely. The dominance of expected returns means risks are shared across the whole market. Concentrated bets are unlikely to pay off.

• Manage expectations. Returns will fluctuate with discount rates, often for reasons unrelated to company fundamentals. Short-term volatility should not drive long-term strategy.

• Stay the course. Evidence-based approaches are designed to withstand the structural forces identified by Golez and Koudijs. Resisting the temptation to chase performance remains critical.

• Recognise limits. Even skilled managers cannot reliably overcome the dominance of discount rate fluctuations. Accepting this can help investors focus on what they can control: asset allocation, costs, and behaviour.

Clarity from complexity

The puzzle that baffled economists for decades now has a convincing answer. Dividend growth became less predictable after 1945 because firms changed their behaviour. By retaining more earnings, they lengthened equity duration and shifted the weight of markets towards expected returns.

For investors, the implications are profound. Stock-picking is not just difficult because markets are competitive; it is structurally harder because the drivers of price movements have changed. The rational response is not to double down on prediction but to adopt strategies that reflect the evidence: diversify, keep costs low, and focus on the long term.

In a world where discount rates matter more than dividend growth, evidence-based investing is not only prudent — it is essential. For investors who understand equity duration, the path is clearer: accept the limits of prediction, embrace diversification, and let the evidence guide the way.

Reference

Golez, B., & Koudijs, P. (2025). Equity duration and predictability. Journal of Finance. Advance online publication.

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