Investors, it’s time to temper your expectations.
This is a key takeaway from my annual roundup of investment providers’ capital market assumptions for the next 10 years. In the latest release, nearly every company included in my summary lowered its return expectations for US stocks. On the other hand, all the companies in my study expect higher returns from non-U.S. stocks than from U.S. stocks over the next 10 years, and some companies’ 10-year bond market forecasts predict higher returns than U.S. stocks. Exceeded return expectations.
How to use predictions
While it’s natural to be skeptical about predicting market direction, especially in the short term, it’s true that you should keep certain return expectations in mind when creating your financial plan. If you can’t incorporate long-term return assumptions, it’s difficult to know how much to save and what your retirement withdrawal rate should be. Long-term historical returns are also an option. But at certain points, such as in 2000, it can lead to overly rosy planning assumptions, which can result in either saving too little or overspending for retirement.
At least once a year, I have compiled capital market assumptions for investment companies in order to draw conclusions about what kinds of return assumptions are reasonable for planning. Companies use a variety of methodologies to arrive at capital market assumptions, but most use a combination of current dividend yields, valuations, and earnings growth expectations to arrive at stock forecasts. The bond return assumption is simpler given the close historical correlation between initial yields and returns over the next 10 years. This explains why firms’ bond return expectations become more homogeneous, with variation mainly due to different time horizons.
Before running through these and other earnings projections, it’s important to keep in mind that these earnings projections are medium-term, not long-term. All of the companies listed below produce capital market forecasts for the next seven to 10 years, not the next 30 years. (BlackRock and Vanguard provide 10-year as well as 30-year forecasts, and Fidelity’s capital markets assumptions apply after 10 years.) However, in terms of making such broad-based forecasts available to the public; , these predictions are outliers. ) Therefore, these predictions will be most relevant to investors heading into that period. The horizon lies within that broad picture, or even new retirees who face a range of reinstatement risks over the next 10 years.
Highlights: The median nominal return for the U.S. stock market over the next 10 years is between 2.8% and 4.8%. The median expected return on US bonds is 4.3% to 5.3% (as of November 2024).
Vanguard’s latest U.S. stock market return forecast is down significantly from a year ago. (The company provides its forecasts in ranges.) The new forecast calls for U.S. stocks to rise between 2.8% and 4.8% over the next 10 years, revised downward from a range of 4.2% to 6.2% in the second half of 2023. It is said that Expectations (6.9% to 8.9%) are about the same as a year ago and are significantly higher than U.S. return expectations. Vanguard also provides forecasts for sub-asset classes. In recent estimates, the 10-year return forecast for value stocks (4.2% to 6.2%) was significantly higher than that for growth stocks (-0.4% to +1.6%). The firm also expects small-cap stocks to outperform large-cap stocks. The former ranged from 4.2% to 6.2%, and the latter from 2.8% to 4.8%.
Vanguard’s return forecast for U.S. aggregate bonds is slightly lower than a year ago, now in the range of 4.3% to 5.3%, versus 4.8% to 5.8% in 2023. The company expects higher returns rather than lower returns, albeit with higher volatility. High-quality bonds: Ranges from 5.3% to 6.3% for U.S. high yield bonds and 5% to 6% for emerging market sovereign debt.
Highlights: The expected 10-year nominal return for U.S. stocks is 6.2%. US aggregate bonds are 3.7% (as of September 30, 2024).
Despite the strong rise in U.S. stocks in 2024, BlackRock was the rare firm to slightly raise its return forecast for U.S. stocks from the previous year. The company’s 10-year U.S. stock return was just over 5% as of September 2023, but that number jumped to 6.2% a year later. Meanwhile, the company’s forecast for non-U.S. stocks over the next 10 years was slightly lower than a year ago. We expected stocks outside the U.S. generally, emerging markets and Europe to rise about 8%. A year ago, these estimates were between 9% and 10%.
Bond returns also declined slightly as of September 2024. BlackRock’s model shows that the expected 10-year return for U.S. aggregate bonds is 3.7%, compared to 5% in 2023.
Fidelity’s capital market assumptions use a 20-year time horizon (2024-2043) and therefore do not stack up neatly with the 10-year returns of other companies in our study.
The firm expects U.S. stocks to have a nominal return of 5.7% and a real return of 3.1% over the next 20 years, less than half of the 7.4% annual real return for U.S. stocks from 2004 to 2023. , significantly lower than the 7% of U.S. stocks. Fidelity cites rising stock valuations as the main constraint to rising U.S. stocks. It has increased over the past 20 years. The firm expects the 20-year return for non-U.S. stocks to be slightly higher than U.S. stocks over the next 20 years, at 6.8% in nominal terms. The firm is most optimistic about the outlook for emerging market stocks, with a nominal value of 8.6%.
On the fixed income side, the firm expected the Bloomberg U.S. Aggregate Bond Index to have a 20-year nominal return of 5.2% (2.6% real) as of April 2024.
Highlight: US large-cap stocks have a nominal return of 6.7% over 10-15 years. The nominal return on US aggregate bonds is 4.6% (as of September 2024).
JPMorgan’s expectations for stock returns over the next 10 to 15 years were higher than most companies surveyed, but down from the firm’s September 2023 numbers. Expectations for U.S. large-cap stocks fell to 6.7% from 7% a year ago as valuations rose. The company’s overall outlook for non-U.S. stocks also declined. The outlook for developed market stocks over 2010 to 2015 is 8.1%, down from 9.2% in late 2023, while for emerging market stocks it is 7.2%. From 8.9% in 2023.
On the fixed income side, the company slightly lowered its return expectations compared to the same period last year. It expects U.S. government debt to return 4.6%, down from 5.1% a year ago. The company’s return expectations for high-risk bond types also fell slightly. The firm’s forecast for 10- to 15-year high-yield bonds was 6.1%, down from 6.5% last year, and its forecast for emerging market government bonds fell to 5.8% from 6.8%.
Highlight: Nominal return for U.S. large-cap stocks over the next 10 years is 6.0%. The nominal return on US aggregate bonds is 4.9% (as of October 31, 2024).
Mr. Schwab slightly lowered his 10-year forecast for U.S. stocks to 6.0% from 6.2% last year. The firm’s outlook for large-cap stocks in developed markets outside the U.S. was also slightly lower than last year’s forecast, at 7.1% versus 7.6% in 2023.
In line with other investment providers’ forecasts, the firm expects U.S. gross debt growth to be 4.9%, compared with 5.7% last year. (All numbers are nominal values.)
Highlight: Nominal return for U.S. large-cap stocks over the next 10 years is 3.4%. The nominal return on US aggregate bonds is 5.1% (as of December 31, 2024, valuation-dependent model).
Research Affiliates’ 10-year forecast for U.S. market returns has fallen from an expected nominal return of 4% for U.S. large-cap stocks at the end of 2023 to 3.4% at the end of 2024. The firm expects U.S. aggregate bonds to outperform stocks over the next year. Ten years on, the expected volatility of bonds has also come down significantly. The firm sees a return advantage for small-cap U.S. stocks compared to large-cap stocks, with an assumed 10-year annualized return of 7.4% for small-cap stocks. Consistent with past expectations, the company expects better results for non-U.S. stocks. The 10-year annualized return for large-cap developed market stocks outside the U.S. is 9.5%, compared with 9% for emerging market stocks.
Highlight: The real return for U.S. large-cap stocks over the next seven years is -6.3%. The real return on US bonds is 1.5% (as of November 2024).
The situation is getting worse! GMO’s expected return on its core U.S. asset class is not only lower than a year ago, but also the lowest of any company surveyed. The firm expects real returns for U.S. large-cap stocks to be -6.3% over the next seven years, a downward revision from the November 2023 real return forecast of -2.6%. Consistent with previous expectations, the company’s outlook for non-U.S. stocks is brighter than expected. For U.S. names: The 7-year real return forecast for international large-cap stocks is 0.4%. 2.5% for international small caps; Emerging country stocks accounted for 2.4%. And the real return for emerging market value stocks (in the case of GMO) is a whopping 5.7%. Both of these numbers are down from a year ago.
The outlook for the company’s bonds also appears to be worse than the numbers for the second half of 2023. The real return for U.S. bonds is expected to be 1.5% (down from 1.9% in 2023), while the real return for emerging market bonds is expected to be 2.5%.
Morningstar Multi-Asset Research (MAR) (private)
Highlight: US stocks have a 10-year nominal return of 5.6%. The 10-year nominal return for US aggregate bonds is 4.9% (as of December 31, 2024).
MAR’s outlook for non-US stocks is significantly better than its outlook for US stocks. The 10-year expected return for U.S. stocks is just 5.6%, compared to 9.6% for non-U.S. developed market stocks and 11% for emerging market stocks. Note that Morningstar has changed the methodology for these forecasts between last year and this year. The forecasts blend Morningstar’s bottom-up equity research with top-down considerations. (Previously, assumptions were top-down only.) Generally, that change boosts the stock’s return forecast. The methodology for bond return assumptions remains unchanged.
