Institutions’ return expectations across assets and time

Institutional investors, asset managers, pension funds, consultants, make big bets based on their return assumptions. This paper shows how these expectations are formed: largely via a common “building-block” model (dividend yields, earnings growth, inflation, P/E changes), and how they vary across asset classes, time periods, and institutions. Better understanding these expectations helps advisors align strategy and communicate clearly.

Institutions’ return expectations across assets and time

• Magnus Dahlquist and Markus Ibert
• Journal of Financial Economics, 2025
• A version of this paper can be found here
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Key Academic Insights

A common model underlies most expectations
The authors find that institutional return forecasts for equities largely boil down to four variables: expected dividend–price ratio, real earnings growth, inflation, and expected change in the P/E ratio. These “building blocks” hold across institutions and geographies.

Subjective expectations align closely with objective benchmarks
Using model-based “objective risk premia” (e.g., CAPE for equities, term premium for bonds), the authors show that institutions’ subjective expected returns track these benchmarks quite closely. In most cases, statistical tests cannot reject the hypothesis that their expectations move one-for-one with the objective version.

Variation is larger across asset classes than across institutions
The paper reveals that differences in return expectations are greater when comparing across asset classes (equities, bonds, emerging markets) than when comparing across institutions. In other words, an institution’s view differs more by asset type than by manager.

Countercyclicality and timing matter
Institutions tend to expect higher risk premia (and thus higher expected returns) in “bad” times (when objective risk premia are elevated) and lower in good times, making their forecasts countercyclical. But the magnitude and direction of this timing effect vary by asset class.

Practical Applications for Investment Advisors

Align client expectations with institutional benchmarks
When speaking with clients about “what return should we expect,” use the same building‐block variables (dividend yields, earnings growth, P/E changes, inflation) that institutions use. It grounds the discussion in industry practice.

Differentiate across asset classes
Recognise that expected returns for equities, bonds, and emerging markets are formed using similar frameworks but produce different levels and volatilities of expectation. That means asset allocation conversations must emphasise why expectations differ by asset type, not just by manager.

Monitor the timing of expected returns
Since institutions’ return expectations are somewhat counter-cyclical, advisors should be aware that “high return expectations” may coincide with riskier periods. Use this insight as a signal to review portfolio risk and positioning.

Use benchmarking for governance
Advisors and allocators can compare their internal return assumptions with broad institution-level benchmarks to identify if they are overly optimistic or conservative relative to peer institutions.

How to Explain This to Clients

“Big institutions set their return expectations using a pretty clear formula: how much companies are paying in dividends, how fast they’ll grow earnings, what they expect inflation to do, and how valuations might change. Their forecasts across stocks, bonds and global markets move together with objective risk measures. We use the same approach to set expectations for your portfolio so you’re not just guessing what “good returns” look like”

The Most Important Chart from the Paper

Figure 3: Objective risk premia over time: it shows the objective US equity, the objective developed markets ex-US equity premium, the objective emerging markets equity premium, the cash risk premium, and the credit risk premium over time. All equity premia and the credit risk premium tend to spike in recessions. That is, these risk premia are countercyclical. Cash risk premia, the negative of the term premium, are characterized by a secular upward trend until the COVID-19 pandemic.

The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged 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 advisors, public pension funds, and professional forecasters. Subjective risk premia vary one-to-one with objective risk premia that are available in real time and countercyclical. Despite their significant time-series variation, several subjective equity premia vary more in the cross-section of institutions than in the time series. This heterogeneity persists both over time and across asset classes. We tie the heterogeneity in subjective equity return expectations to heterogeneous expectations about long-term equity valuations: some institutions believe that the price–earnings ratio behaves like a random walk, whereas others believe in varying degrees of mean reversion.