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Theory suggests that competition tends to equalize profit rates through the process of capital reallocation, and numerous studies have confirmed that profit rates are indeed persistent and mean-reverting. Recent empirical evidence further shows that fluctuations in the profitability of surviving corporations are well approximated by a stationary Laplace distribution. Here we show that a parsimonious diffusion process of corporate profitability that accounts for all three features of the data achieves better out-of-sample forecasting performance across different time horizons than previously suggested time-series and cross-sectional models. As a consequence of replicating the empirical distribution of profit rates, the model prescribes a particular strength or speed for the mean-reversion of all returns, which leads to superior forecasts of individual time-series when we exploit information from the cross-sectional collection of …