Morgan Stanley sent a big note to clients this morning in an attempt to resolve the huge debate sparked by Bill Gross and Jeremy Siegel recently over the relationship between stock market returns and GDP growth.

In the note, Morgan Stanley economist Gerard Minack featured a chart breaking down the drivers of stock market returns: dividends, changes in earnings per share, and changes in the price-to-earnings valuation ratio.

Morgan Stanley



Minack writes that while both earnings and valuations tend to revert to average levels after periods of outperformance and underperformance, the mean reversion can take a very long time to occur: