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Marketscape | 02.18.25

Capital Market Assumptions: 10-Year Outlook

Chief Investment Officer of Global Asset Allocation, Anwiti Bahuguna, Ph.D., outlines the investment themes and return expectations from our new 10-year outlook.

KEY POINTS

What it is

Each year we comprehensively review our long-term outlook, detailing our projections for asset class returns and identifying key investment themes.

Why it matters

Exploring our long-term perspective may help investors navigate the key trends we’ve identified for the next 10 years.

Where it's going

We project moderate equity returns and higher bond returns over the next decade, driven by forces like AI, new energy solutions, and global trade.

Each year we comprehensively review our long-term outlook, identifying the investment themes and asset class forecasts that underpin our portfolio construction. We expect artificial intelligence, the pursuit of new energy sources, and persistent global trade to drive markets. Over the next 10 years, we are forecasting higher bond returns and moderate equity returns versus the previous 10 years. Let’s take a closer look.

Our confidence in AI lies in its potential longer-term productivity boost versus shorter-term adoption. Near-term gains may come in spurts or may be muddied by other data. We believe AI adoption and gains will likely be evident longer-term, as the technology is adopted and use cases are refined.

Globalization may have slowed but it has not reversed. Geopolitical tensions are morphing supply chains and trade pacts, likely leading to risks and opportunities over the next decade. This may present investors with the opportunity to be increasingly selective. The world is still highly integrated, leading us to view further fragmentation as a risk but not a foregone conclusion.

Global energy demand continues to increase and requires a robust set of options, innovations, and finance mechanisms. Countries are seeking to satisfy surging demand for energy, secure more energy independence and meet commitments to slow climate change. To do so, many are diversifying their energy sources, improving energy technology, and securing raw material supplies.

We incorporate these themes, along with other long-term market and economic trends, to develop our 10-year forecasts across asset classes.  For stocks, divergence in the performance of U.S. and non-U.S. markets has been prevalent over the past 15 years, and we expect that U.S. equity markets will continue to outperform. We expect returns of developed ex-U.S. equities to lag those of the U.S. for the coming 10-year period. While their price-to-earnings multiples have been attractive, our outlook for slower economic growth doesn’t support any significant expansion in these markets. Despite solid sales growth, profit margins, dividend yields, and attractive valuations, emerging markets have delivered lower returns versus developed markets since the Global Financial Crisis. Heavy share issuance, most notably in China, has offset those strong fundamentals, suppressing stock performance, and we expect this trend to continue.

In the bond market, we expect lower cash yields and steeper yield curves to shape returns over the next decade. We expect credit spreads to rise, though they will likely stay below historical averages. We anticipate that slow-to-moderate economic growth will persist, and that inflation should stay largely in check. Short-term rates are likely to decline early in the 10-year investment horizon, followed by a modest yield-curve steepening later.

Over the next decade, adoption of AI , new energy sources, and adjustment of trade partners will likely drive divergent paths in economic growth globally. We expect decent equity returns, improved bond performance, and moderate economic growth to drive portfolio performance. Our 10-year forecasts call for a 6.4% annualized return, on average, for a portfolio with 60% in global equities and 40% in U.S. investment grade bonds, versus the 6.8% annualized return over the past 10 years for the 60/40 portfolio. 

 

 

Meet Your Expert

Anwiti Bahuguna, Ph.D.

Chief Investment Officer — Global Asset Allocation

 

Anwiti Bahuguna, Ph.D., is chief investment officer of global asset allocation for Northern Trust Asset Management. She is responsible for managing investment performance, process and philosophy for multi-asset strategies globally. Anwiti leads NTAM’s strategic asset allocation, tactical asset allocation and capital market assumptions, and oversees the portfolio construction group and multi-manager business.

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IMPORTANT INFORMATION

Northern Trust Asset Management (NTAM) is composed of Northern Trust Investments, Inc., Northern Trust Global Investments Limited, Northern Trust Fund Managers (Ireland) Limited, Northern Trust Global Investments Japan, K.K., NT Global Advisors, Inc., 50 South Capital Advisors, LLC, Northern Trust Asset Management Australia Pty Ltd, and investment personnel of The Northern Trust Company of Hong Kong Limited and The Northern Trust Company.

 

Issued in the United Kingdom by Northern Trust Global Investments Limited, issued in the European Economic Association (“EEA”) by Northern Trust Fund Managers (Ireland) Limited, issued in Australia by Northern Trust Asset Management (Australia) Limited (ACN 648 476 019) which holds an Australian Financial Services Licence (License Number: 529895) and is regulated by the Australian Securities and Investments Commission (ASIC), and issued in Hong Kong by The Northern Trust Company of Hong Kong Limited which is regulated by the Hong Kong Securities and Futures Commission.

 

For Asia-Pacific (APAC) and Europe, Middle East and Africa (EMEA) markets, this information is directed to institutional, professional and wholesale clients or investors only and should not be relied upon by retail clients or investors. This information may not be edited, altered, revised, paraphrased, or otherwise modified without the prior written permission of NTAM. The information is not intended for distribution or use by any person in any jurisdiction where such distribution would be contrary to local law or regulation. NTAM may have positions in and may effect transactions in the markets, contracts and related investments different than described in this information. This information is obtained from sources believed to be reliable, its accuracy and completeness are not guaranteed, and is subject to change. Information does not constitute a recommendation of any investment strategy, is not intended as investment advice and does not take into account all the circumstances of each investor.

 

This report is provided for informational purposes only and is not intended to be, and should not be construed as, an offer, solicitation or recommendation with respect to any transaction and should not be treated as legal advice, investment advice or tax advice. Recipients should not rely upon this information as a substitute for obtaining specific legal or tax advice from their own professional legal or tax advisors. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities. Indices and trademarks are the property of their respective owners. Information is subject to change based on market or other conditions.

 

All securities investing and trading activities risk the loss of capital. Each portfolio is subject to substantial risks including market risks, strategy risks, advisor risk, and risks with respect to its investment in other structures. There can be no assurance that any portfolio investment objectives will be achieved, or that any investment will achieve profits or avoid incurring substantial losses. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Risk controls and models do not promise any level of performance or guarantee against loss of principal. Any discussion of risk management is intended to describe NTAM’s efforts to monitor and manage risk but does not imply low risk.

 

Past performance is not a guarantee of future results. Performance returns and the principal value of an investment will fluctuate. Performance returns contained herein are subject to revision by NTAM. Comparative indices shown are provided as an indication of the performance of a particular segment of the capital markets and/or alternative strategies in general. Index performance returns do not reflect any management fees, transaction costs or expenses. It is not possible to invest directly in any index. Net performance returns are reduced by investment management fees and other expenses relating to the management of the account. Gross performance returns contained herein include reinvestment of dividends and other earnings, transaction costs, and all fees and expenses other than investment management fees, unless indicated otherwise. For U.S. NTI prospects or clients, please refer to Part 2a of the Form ADV or consult an NTI representative for additional information on fees.

 

Forward-looking statements and assumptions are NTAM’s current estimates or expectations of future events or future results based upon proprietary research and should not be construed as an estimate or promise of results that a portfolio may achieve. Actual results could differ materially from the results indicated by this information.

 

Not FDIC insured | May lose value | No bank guarantee