This paper examines the predictability of stock returns in France, Germany, Japan, the UK, and the US using three instruments: the dividend yield, the earnings yield, and the short rate. The authors propose a present value model with earnings growth, payout ratios, and the short rate as state variables. They find that the short rate is the only robust short-run predictor of equity returns, while the evidence on earnings and dividend yield predictability is not robust to increased sample periods or finite sample corrections. The authors also find no evidence of long-horizon predictability once finite sample effects are accounted for. Cross-country predictability appears stronger than predictability using local instruments. The paper concludes that the current predictability debate focuses on the wrong horizon (long-run instead of short-run), the wrong instruments (yield variables instead of interest rates), and the wrong setting (US segmented market instead of a globally integrated market). The authors also find that US instruments are strong predictors of foreign equity returns, unlike local instruments. The local short rate effect is subsumed by the predictive power of the US short rate. The authors confirm and extend Bekaert and Hodrick (1992)'s finding that yield variables have predictive power for excess returns in the foreign exchange market.This paper examines the predictability of stock returns in France, Germany, Japan, the UK, and the US using three instruments: the dividend yield, the earnings yield, and the short rate. The authors propose a present value model with earnings growth, payout ratios, and the short rate as state variables. They find that the short rate is the only robust short-run predictor of equity returns, while the evidence on earnings and dividend yield predictability is not robust to increased sample periods or finite sample corrections. The authors also find no evidence of long-horizon predictability once finite sample effects are accounted for. Cross-country predictability appears stronger than predictability using local instruments. The paper concludes that the current predictability debate focuses on the wrong horizon (long-run instead of short-run), the wrong instruments (yield variables instead of interest rates), and the wrong setting (US segmented market instead of a globally integrated market). The authors also find that US instruments are strong predictors of foreign equity returns, unlike local instruments. The local short rate effect is subsumed by the predictive power of the US short rate. The authors confirm and extend Bekaert and Hodrick (1992)'s finding that yield variables have predictive power for excess returns in the foreign exchange market.