Evaluating our short-horizon expected equity return estimates

In our Insights piece published end-October 2025, we discussed short- and long-term expected returns across segments of equity markets. We argued that despite high starting valuations, the short-horizon expected return on the US equity market was still relatively high, and our estimates across equity markets showed that emerging market equities — in particular Korea and Brazil — had the highest expected returns at the 1-year horizon. The chart from that piece is reproduced below, showing 1- and 10-year expected returns by country.

This note is a brief check-in on how those estimates have panned out since. We are roughly four months on from the article, so not a full year in line with the horizon of the estimates, but an evaluation of expected return measures versus realised returns is still an interesting exercise (and 3 or 6 month expected return estimates are highly correlated with 1-year ahead).

The scatter plot below shows realised returns between end-October 2025 and end-February 2026 on the y-axis and one-year ahead expected returns as of end-October 2025 on the x-axis. We've also added US and European equity sectors to the country-level returns. Overall, there is a positive correlation between expected and realised of 0.25. Korean and Brazilian equity markets delivered among the highest returns, in line with how our expected returns ranked them last year, and are helping to lift the correlation in the chart. Short-term prediction and tactical asset allocation is difficult, and our estimates are providing a useful signal across noisy market and sector returns.

In the bottom-right area of the scatter, the outliers to the positive relationship are mostly growth-oriented equity segments such as US and European Technology sectors and the NASDAQ 100 — areas that have been subject to an AI-driven repricing and valuation concerns. These misses help give context to what we can hope for when predicting returns with expected return estimates (the chart correlation is 0.40 excluding Tech sectors and NASDAQ). Expected returns account for only a (small) part of realised returns; the rest is driven by unexpected shocks, whether from repricing of growth, rates, or risk premia. It therefore is natural that outliers in this exercise cluster in segments that have seen significant repricing (previously discussed in this Insights article on return decompositions).

More broadly, the bar for predicting future returns is extremely high. Even a noisy signal that points broadly in the right direction can be useful for investors, of course, and this applies especially at short horizons. For anticipating asset class returns, expected returns provide a useful but mild guide to future returns, and the remainder of future returns can only be accounted for by anticipating (through scenarios) changing market-level views that by definition are not priced in today.

Building useful signals

Beyond providing useful signals of future returns, two features are also critical for expected return estimates. First, estimates need to be available at a relatively granular level — across regions, sectors, and styles — which increases their potential in asset allocation decisions. This is essentially the old argument about Fundamental Laws of Active Management - that breadth of coverage can improve Information ratios. Second, expected return estimates need to be available across horizons - especially short ones - and in near-real time, so that investors and allocators can act on horizon-aligned signals in a timely way. In combination, these features make our offering distinctive and help our clients build better portfolios.