Asset prices are often viewed through a simplistic lens. Investors form expectations, discount future cash flows, and set prices accordingly. But in reality, expectations themselves are complex. They vary by institution, by asset class and over time. This paper presents a new perspective. Institutional expectations are not random or merely behavioral. They are structured, data-driven and closely linked to economic fundamentals. The result is a powerful insight. Institutional investors mostly behave in accordance with rational asset pricing models. At the same time, however, they strongly disagree with each other, and this disagreement has important implications for markets.
Institutional return expectations by assets and time
- Magnus Dahlquist, Markus Ibert
- Journal of Financial Economics, 2026
- A version of this paper can be found here here
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Key academic insights
Institutional expectations align with rational models
The paper shows that subjective risk premiums from institutional investors and professional forecasters move closely with objective model-based risk premiums. These objective measures are countercyclical. They rise in recessions and fall in expansions. The fact that subjective expectations move one-to-one with them supports the idea that time-varying risk premia are central to asset pricing.
Time variations in expected returns are systematic
Across stocks, credit and cash, institutional expectations follow well-known predictors such as valuation ratios and term premiums. This suggests that expected returns are not arbitrary. They respond to economic conditions in a predictable manner.
The disagreement between the institutions is great and continuous
Despite the strong convergence in the time series, expectations vary significantly between institutions at any given time point. In many cases, this change in cross-section is greater than the change over time. This underscores that disagreement is an essential feature of financial markets.
Valuation assumptions drive most disputes
The main source of disagreement is not growth or inflation. It’s an assessment. Specifically, institutions differ in their assumptions about how price-earnings ratios evolve over time. Some expect a medium rebound. Others assume the ratings continue. This single difference explains most of the variation in expected returns on equity.
A common framework underlies expectations
Most institutions use a “building blocks” approach. Expected returns are broken down into income, growth, inflation and changes in valuation. While the framework is common, the inputs differ. This leads to very different results.
Risk expectations are consistent across asset classes
Institutions form coherent views across markets. An investor who is bullish on stocks is usually also bullish on credit and other risky assets. This reflects a macro-driven process where growth and inflation expectations feed across multiple asset classes.
Retail and institutional investors behave differently
Unlike retail investors, who often extrapolate recent returns, institutional investors’ expectations are countercyclical. They increase expected returns when markets fall and decrease them when markets rise. This distinction is critical to understanding market dynamics.
Practical applications for investment advisors
Understand who drives market expectations
Small differences in valuation expectations can lead to large differences in expected returns. Advisers should pay attention to assumptions about long-term valuation levels when building capital market expectations.
Recognize ongoing disagreements
There is no single “correct” expected return. Even sophisticated institutions strongly disagree. This reinforces the importance of diversification and strong portfolio construction.
Include directed macro thinking
Return expectations across all asset classes are correlated. Growth, inflation and interest rates shape expectations broadly. Portfolio decisions should reflect this integrated perspective.
How to explain this to customers
“Professional investors do not see the entire market in the same way. Even when using similar models, small differences in assumptions can lead to very different expectations of future returns. What matters is that these expectations are not random. They tend to rise when markets are stressed and fall when markets are strong. This is how markets adapt to risk. At the same time, it is so important that disagreements are managed. uncertainty that comes from different views of the future.”
The most important chart from the paper
In Figure 1 we can see the regression coefficients with 95% confidence bands. The figure presents estimates of the slope coefficient ofTable 3along with their 95% confidence bands. The upper part of the band for wealth advisers cash risk premium is 3.715 and outside the charted range.
Results are hypothetical results and are NOT an indication of future results and do NOT represent returns actually achieved by any investor. Indices are not managed and do not reflect management or trading fees, and one cannot invest directly in an index.
ABSTRACT
We study the equity, cash and corporate bond risk premium expectations of asset managers, investment consultants, wealth advisers, public pension funds and professional forecasters. Subjective risk premiums vary one-for-one with objective risk premiums that are available in real time and countercyclically. Despite their significant time-series variations, some subjective equity premiums vary more across the cross-section of institutions than across time-series. This heterogeneity persists both over time and across asset classes. We relate heterogeneity in subjective expectations of equity returns to heterogeneous expectations of long-term equity valuations: some institutions believe that the price-earnings ratio behaves like a random walk, while others believe in different rates of mean reversion.
Institutional return expectations by assets and time originally published in Alpha Architect. Please read the Alpha Architect FINDINGS at your convenience.
