Cliff Asness: Get Your Expectations in Line With Reality

In this article, AQR assess the assumption built into today’s market and what that likely will mean for forward returns. These insights aim to guide investors in setting realistic medium-term (5-10 years) expectations while emphasizing the importance of valuation discipline and diversification in navigating compressed risk premia across asset classes.

Here are the key take-aways:

  • Medium-Term Expected Returns: A global 60/40 portfolio (60% equities, 40% bonds) is projected to deliver a real return of 3.5%, an improvement from the 2021 low of 2% but still below the long-term U.S. average of nearly 5%. Equity returns remain compressed due to high valuations, with U.S. equities expected to underperform other developed markets due to richer valuations and lower risk premia.
  • Government Bonds and Credit Markets: Bond yields have risen significantly since their historic lows in 2021, offering positive real returns across most major markets. U.S. 10-year Treasuries are expected to deliver a 2.5% real return. Credit markets, including investment-grade and high-yield bonds, show improved expected returns due to higher Treasury yields and better rolldown effects, with U.S. corporate high-yield bonds projected at a real return of 3.5%.
  • Growth Expectations and Equity Valuations: U.S. corporate earnings growth has been robust historically but is projected to moderate to around 2% annually over the long term. Current U.S. equity valuations imply overly optimistic growth expectations, with the market pricing in growth rates significantly higher than AQR’s assumptions.
  • Diversification and Tactical Adjustments: Broad diversification across asset classes and regions remains critical for long-term portfolio resilience. While some tactical opportunities (e.g., equity value style) have normalized, maintaining exposure to diversified factors is recommended given the uncertainty in market conditions.

The long-term benefits of a diversified portfolio do not accrue steadily, but rather come in waves. Unfortunately, many investors give up on diversification – across regions and asset classes – just as the next wave is about to break.

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Disclaimer of liability

The above has been prepared by Børsgade ApS for information purposes and cannot be regarded as a solicitation or recommendation to buy or sell any security. Nor can the information etc. be regarded as recommendations or advice of a legal, accounting or tax nature. Børsgade cannot be held liable for losses caused by customers’/users’ actions – or lack thereof – based on the information in the above. We have made every effort to ensure that the information in the above is complete and accurate, but cannot guarantee this and accept no liability for errors or omissions.

Readers are advised that investing may involve a risk of loss that cannot be determined in advance, and that past performance and price development cannot be used as a reliable indicator of future performance and price development. For further information please contact info@borsgade.dk

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