Investors, it’s time to tone down your expectations.
That’s a key takeaway from my nonannual roundup of investment providers’ capital markets assumptions for the next decade. In their most recent release, nearly every firm in my roundup had reduced their return expectations for US stocks. Meanwhile, every firm in my survey is expecting higher returns from non-US stocks than domestic over the next 10 years, and some firms’ 10-year bond market forecasts are higher than their return expectations for US stocks.
How to Use the Forecasts
Although it’s reasonable to be skeptical about predicting the market’s direction, especially over the short term, the fact is that you need to have some type of return expectation in mind when you’re creating a financial plan. If you can’t plug in a long-term return assumption, it’s tough to figure out how much to save and what sort of withdrawal rate to use once you retire. Long-term historical returns are one option. But at certain points in time—like 2000—they might lead to overly rosy planning assumptions, which in turn might lead you to save too little or overspend in retirement.
To draw some conclusions about what sorts of return assumptions might be reasonable for planning, I have been amalgamating investment firms’ capital markets assumptions at least once a year. Firms use different methodologies to arrive at their capital markets assumptions, but most employ some combination of current dividend yields, valuation, and earnings-growth expectations to guide their equity forecasts. Fixed-income return assumptions are more straightforward given the tight historical correlation between starting yields and returns over the next decade. That explains why you see more uniformity among firms’ fixed-income return expectations, with variations driven largely by time-period differences.
Before you take these or any other return forecasts and run with them, it’s important to bear in mind that these return estimates are more intermediate-term than they are long-term. The firms I’ve included below all prepare capital markets forecasts for the next seven to 10 years, not the next 30. (BlackRock and Vanguard do provide 30-year forecasts as well as 10-year, and Fidelity’s capital markets assumptions apply to a 20-year horizon. But those are outliers in terms of making such far-reaching forecasts available to the public.) As such, these forecasts will have the most relevance for investors whose time horizons are in that ballpark, or for new retirees who face sequence-of-return risk in the next decade.
Highlights: Nominal median US equity market return of 2.8%-4.8% during the next decade; 4.3%-5.3% median expected return for US fixed income (as of November 2024).
Vanguard’s latest US equity market return forecast is down meaningfully from where it was a year ago. (The firm presents its forecasts in a range.) The new forecast calls for US equity gains of 2.8%-4.8% over the next decade, down from a range of 4.2%-6.2% in late 2023. Its non-US equity return forecast (6.9%-8.9%) is roughly unchanged from a year ago and substantially higher than the US return expectation. Vanguard provides subasset-class forecasts, too. In its most recent run, its 10-year return forecast for value stocks (4.2%-6.2%) was substantially higher than its outlook for growth names (negative 0.4% to positive 1.6%). The firm also expects small-cap stocks to best large-cap stocks: The range for the former was 4.2%-6.2% versus 2.8%-4.8% for the latter.
Vanguard’s return expectations for US aggregate bonds are slightly lower than they were a year ago: a range of 4.3%-5.3% today versus 4.8%-5.8% in 2023. The firm is expecting better returns—albeit with higher volatility—from lower-quality bonds: a range of 5.3%-6.3% for US high-yield bonds and 5%-6% for emerging-markets sovereign bonds.
Highlights: 6.2% 10-year expected nominal return for US equities; 3.7% for US aggregate bonds (as of Sept. 30, 2024).
Despite US stocks’ strong gains in 2024, BlackRock was a rare firm in that it increased its US equity return expectations a bit from the year prior. The firm’s 10-year US equity return was just over 5% in September 2023, but that number jumped to 6.2% a year later. Meanwhile, the firm’s forecasts for non-US equities over the next decade were a bit lower than in the previous year: It was expecting gains of roughly 8% for non-US stocks broadly as well as emerging markets and European equities; those estimates were 9%-10% a year ago.
Fixed-income returns dipped slightly, too, as of September 2024. BlackRock’s models call for a 3.7% expected 10-year return from US aggregate bonds versus 5% in 2023.
Fidelity’s capital markets assumptions employ a 20-year horizon (2024-43) and therefore can’t be stacked up neatly against the 10-year returns from other firms in our survey.
The firm is forecasting a 5.7% nominal and a 3.1% real return for US equities over the next 20 years, less than half of US stocks’ 7.4% annualized real return over the period from 2004 to 2023 and well below US stocks’ 7% real return since 1926. Fidelity cites elevated equity valuations as the main constraint on US equity gains relative to their gains over the past 20 years. The firm expects the 20-year returns on non-US stocks to be a bit higher than US stocks over the next two decades: 6.8% nominally. The firm is most sanguine about the prospects for emerging-markets equities: 8.6% nominally.
On the fixed-income side, the firm was forecasting a 5.2% nominal 20-year return (2.6% real) for the Bloomberg US Aggregate Bond Index as of April 2024.
Highlights: 6.7% nominal returns for U.S. large-cap equities over a 10- to 15-year horizon; 4.6% nominal returns for US aggregate bonds (as of September 2024).
J.P. Morgan’s expectations for equities’ returns over the next 10-15 years were higher than most of the firms in our survey, but they declined from the firm’s September 2023 numbers. Owing to higher valuations, its forecast for US large caps dropped to 6.7% from 7% a year ago. The firm’s outlook for non-US equities generally declined, too: Its 10- to 15-year outlook for developed-markets equities was 8.1%, down from 9.2% in late 2023, and for emerging-markets equities it was 7.2%, down from 8.9% in 2023.
On the fixed-income side, the firm reduced return expectations slightly relative to the year-ago period. It’s expecting a 4.6% return from US aggregate bonds, down from 5.1% a year ago. The firm’s return expectations for high-risk bond types also declined slightly. The firm’s 10- to 15-year forecast for high-yield bonds is 6.1%, down from 6.5% last year, and its forecast for emerging-markets sovereign bonds dropped to 5.8% from 6.8%.
Highlights: 6.0% nominal returns for US large caps during the next 10 years; 4.9% nominal returns for US aggregate bonds (as of Oct. 31, 2024).
Schwab modestly lowered its 10-year return expectations for US stocks to 6.0% from 6.2% a year ago. The firm’s outlook for non-US developed-markets large caps was also a bit lower than last year’s forecast: 7.1% versus 7.6% in 2023.
In line with the outlook from other investment providers, the firm is forecasting a 4.9% gain for US aggregate bonds versus 5.7% last year. (All figures are nominal.)
Highlights: 3.4% nominal returns for US large caps during the next 10 years; 5.1% nominal returns for US aggregate bonds (as of Dec. 31, 2024; valuation-dependent model).
Research Affiliates’ 10-year US market return expectations declined, from a 4% nominal return projection for US large caps at the end of 2023 to 3.4% at year-end 2024. The firm is expecting US aggregate bonds to outperform stocks over the next decade, and its expected volatility for bonds is also substantially lower. The firm accords a return edge to US small-cap stocks versus large-cap stocks: a 7.4% 10-year annualized return assumption for small caps. Consistent with past forecasts, the firm is expecting better things from non-US stocks: a 9.5% 10-year annualized return for developed-markets large-cap stocks outside the US and 9% for emerging-markets equities.
Highlights: Negative 6.3% real returns for US large caps over the next seven years; 1.5% real returns for US bonds (as of November 2024).
They’re getting worse! Not only were GMO’s return expectations for core US asset classes lower than they were a year ago, they were the lowest of any firm in our survey. The firm is expecting negative 6.3% real returns for US large caps over the next seven years, down from its negative 2.6% real return forecast in November 2023. Consistent with previous forecasts, the firm’s outlook for non-US stocks is brighter than its expectation for US names: The seven-year real return forecast for international large caps is 0.4%; 2.5% for international small-caps; 2.4% for emerging-markets equities; and a whopping (for GMO) 5.7% real return for emerging-markets value stocks. All of those numbers are lower than they were a year ago.
The firm’s outlook for bonds also looks worse than its late-2023 number: a 1.5% real return for US bonds (down from 1.9% in 2023) and a 2.5% real return forecast from emerging-markets bonds.
Morningstar Multi-Asset Research (MAR) (not public-facing)
Highlights: 5.6% 10-year nominal returns for US stocks; 4.9% 10-year nominal returns for US aggregate bonds (as of Dec. 31, 2024).
MAR’s outlook for non-US stocks is substantially better than its case for US stocks. While the 10-year return expectation for US stocks is just 5.6%, it’s 9.6% for non-US developed-markets stocks and 11% for emerging-markets equities. Note that Morningstar changed its methodology for these forecasts between last year’s installment and this year’s: The forecast now blends Morningstar’s bottom-up equity research with top-down considerations. (Previously, the assumptions were top-down only.) In general, that change pushes up the return forecast for equities. The methodology for fixed-income return assumptions stayed the same.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.