Subjective Return Expectations

I document that the return expectations of Wall Street analysts are contrarian and countercyclical, contrasting with existing evidence that return expectations among Main Street investors (CFOs, retail investors) appear exclusively extrapolative and positively correlated. I demonstrate that an expectation formation framework in which investors use imperfect predictors to minimize forecast errors can rationalize these facts. Estimating the framework using surveys, I find Wall Street and Main Street disagree on what fundamental news means for future returns while agreeing on a persistent fundamental process driving most variations of asset prices. These results support models featuring heterogeneous agents with persistent fundamental expectations.