We propose a new method for decomposing realized stock market capital gains into contributions from changes to the real yield curve, equity premia, and expected dividends. The method can be implemented period by period. It requires no regressions and is instead based on calculating the effects of changes to the various inputs of the present value formula. We provide two versions of the decomposition, one which uses financial markets data alone: the real yield curve, near-term options-based equity premia, and dividend futures (to assess the weight of dividend strips of different maturities in the market), and one supplementing this with data on growth in analyst earnings forecasts as a guide to growth in dividend expectations.

We implement our method in US data for the S\&P500 for 2005-2023. Changes to expected dividends played the dominant role for the cumulative capital gain in the market over this period, while changes to the real yield curve and equity premia contributed more to capital gain fluctuations, with real yield curve shifts driving a large positive capital gain in 2020 but a large negative capital gain in 2022. Changing near-term equity premia contribute to returns mostly in crisis. In general, the roles of the real yield curve, equity premia, and expected dividends vary dramatically across periods and we highlight the heterogeneous drivers of the 2008, 2020, and 2022 market drawdowns.