Antti Is (Still) Trying to Understand Return Expectations

Cliff Asness highlighted a new research series by his AQR partner Antti Ilmanen on how investors actually form beliefs about expected returns—a shift from Ilmanen's prior focus on forecasting reasonable return expectations themselves. The distinction matters because academic research and investor surveys often diverge starkly, particularly at valuation extremes like 2000, 2021, and 2024, where high prices imply low future returns yet surveys show investors expecting high returns. Asness identified two root causes of this divergence. Academics approach expected returns through the denominator of present-value models (required returns), while many practitioners focus on the numerator (cash flows), associating high expected cash flows with high expected returns regardless of price paid. Additionally, consensus forecasts from individual investors and equity analysts extrapolate excessively from recent performance—good years in the rearview mirror become over-optimistic earnings growth and return predictions. This "rearview mirror mindset" has driven valuations too high in periods like 2000, 2021, and potentially 2024, locking in objectively low future returns. Ilmanen's series documents that institutional and bond investors behave more rationally than individual and equity investors, and that equity analysts are perennially overoptimistic. Historical evidence shows that betting against unrealistic growth optimism at the market level outperforms simple multi-year extrapolation strategies over long horizons. Asness framed the series as timely given "quite a bit of nuttiness in markets" across relative stock pricing, US versus non-US equity valuations, and investor flows over the past 5–10 years.