Expected returns on stocks and bonds - Investors must moderate their expectations.

There is an ongoing shift in opinion about expected asset returns. Ex antE equity returns are less transparent and thus more open to question than ex ante bond returns. Long-term equity returns have traditionally been predicted from historical average market returns, but today they are increasingly predicted using dividend discount models. Realized average returns are misleading guides for the future when expected returns vary over time, and our recent bear market has made investors more aware of forward-looking expected return measures; the starting price matters. Neither of two types of "expected returns"-objectively feasible long-run returns and subjective (often hoped-for, extrapolative) return expectations-can be directly observed, but we can try to estimate them by analyzing historical returns, investor surveys, and market valuation indicators. Objectively feasible equity returns have been low for several years (5%-8%), but subjective return expectations have begun to moderate only recently. The divergence between objective and hoped-for returns was extraordinarily wide around 2000; while the gap has narrowed since, it may not have fully closed.