2024 Capital Markets Assumptions

Our macro scenarios framework reflects a high probability of a soft landing ahead for the U.S. economy. We expect inflation to continue to moderate but stay above the Federal Reserve’s (Fed’s) 2.0% target over the next five years. These conditions underpin our medium-term (3- to 5-year) capital market assumptions (CMAs) for 2024.

• Cash returns should remain ahead of inflation in the “higher for longer” regime. Given today's starting yields, our forecast for longer-dated bond returns is healthy.

• High valuations caused us to lower our forecasts for equities while acknowledging the higher earnings power of U.S. growth stocks.

Mean-Reverting P/E Multiples Constrain Equity Return Forecasts, Shift Return Frontier Slightly Lower

Our expectation of lower P/E multiples by the end of the five-year period is the main driver for reducing our equity return forecasts. Only U.S. small-cap equities avoid this haircut across the broad global equity landscape. Meanwhile, U.S. large-cap equities, characterized by extreme concentration and high valuations, see their return forecast fall by 0.5% to an arithmetic average annual return of 7.3%. Robust earnings growth projections for U.S. growth stocks help to maintain a return forecast in line with U.S. value.

Our fixed-income forecasts are little changed compared with 2023, remaining compelling after 2022’s sell-off. Our cash forecast rose 0.25%, while the average inflation expectation fell to 2.5% compared to 3.0% in 2023. As a result, the forecasted average annual return to a combination of 60% global stocks/40% global bonds for the next five years now stands at 6.4%, down slightly from 6.8% in last year’s medium-term outlook.

Research Notes: Multiple Model Techniques Contribute to Our Final Forecasts

Our capital markets forecasts adhere to three key principles of our research process:

1. Economically sound and intuitive underpinnings.

2. Transparency to the underlying assumptions.

3. Systematic development and review to reduce biases.

With these principles in mind, we use diverse techniques to model the “building blocks” of our return forecasts across asset classes. These building blocks form the basis for an internally consistent set of projections across more than 50 asset classes.

• Building blocks for our return forecasts include fundamental inputs such as inflation, cash, real yields, real and earnings growth. Before settling on the values for these key determinants, we evaluate possible outcomes using scenario-based analyses and historical behavior. We then broaden our approach to all asset classes, utilizing models appropriate to each.

• Our macro scenario modeling framework incorporated our longer-term research into the major economic drivers over the next decade. While not direct inputs to our CMAs, these long-term scenarios aided in identifying six distinct potential economic paths over the next five years. We then applied probability weightings to each scenario to arrive at a set of return expectations under this modeling approach.

Accompanying Tables

Our soon-to-be-revised 2019 paper, “Long-Term Capital Market Assumptions,” provides a high-level description of our methodology. Our medium-term (3- to 5-year) CMAs are here, and our long-term CMAs are available on request.