10-Year Forecast for Major Asset Classes
While it is impossible to predict the future, quantitative models can help us get a general idea of how different asset classes might perform in the future.
One example is the Vanguard Capital Markets Model (VCMM), which produced a set of 10-year annualized return projections for both equity and fixed income markets.
Return on capital
The capital projections from this infographic are listed in the following table.
| Asset class | Return forecast (lower) | Return forecast (upper) | Median volatility |
|---|---|---|---|
| US stocks | 4.1% | 6.1% | 17.0% |
| US Potential Value Stocks | 4.4% | 6.4% | 19.6% |
| US Growth Stocks | 1.4% | 3.4% | 18.2% |
| US Large Cap Stocks | 4.1% | 6.1% | 16.7% |
| US Small Cap Stocks | 4.4% | 6.4% | 22.3% |
| US Real Estate Investment Trusts | 4.4% | 6.4% | 20.1% |
| Global equities excluding US (unhedged) | 6.4% | 8.4% | 18.2% |
| Developed Markets excluding US Global Equities (Unhedged) | 6.1% | 8.1% | 16.6% |
| Emerging Market Shares (Unhedged) | 6.1% | 8.1% | 25.9% |
The key takeaway here is that Vanguard expects international equities to outperform US equities over the next decade.
We believe that valuation-based gains in US stocks have the potential for lower returns this decade.
Valuation-based expansion refers to an increase in a company's market value, not its intrinsic value. In other words, Vanguard does not believe that the current valuation of US stocks is justified and that it will hurt performance over the next decade.
Reasons cited for international dominance include more favorable valuations, higher dividend payout ratios, and a potentially weaker US dollar.
Fixed Income
Now moving on to fixed income, here are the projections used in this infographic.
| Asset class | Return forecast (lower) | Return forecast (upper) | Median volatility |
|---|---|---|---|
| US total bonds | 3.6% | 4.6% | 5.5% |
| US treasury bonds | 3.3% | 4.3% | 5.7% |
| U.S. bridging bonds | 4.2% | 5.2% | 5.2% |
| US high yield corporate bonds | 5.5% | 6.5% | 10.1% |
| US Treasury Inflation Protected Securities | 2.7% | 3.7% | 5.0% |
| US cash | 3.4% | 4.4% | 1.4% |
| Global Bonds ex-US (hedged) | 3.6% | 4.6% | 4.4% |
| Emerging Market Sovereign Bonds | 5.6% | 6.6% | 10.9% |
| US inflation | 2.0% | 3.0% | 2.3% |
Several bond indices posted record declines in 2023, thanks to the unprecedented pace of interest rate hikes. Despite this turmoil, Vanguard believes that longer-term investors will actually be better off as a result. The reason for this is that the cash flows can now be reinvested at much higher rates, which should offset any decline in the investor's bond portfolio over time.
Vanguard also expects US inflation to be contained over the next decade. The firm is confident in the ability of central banks to keep inflation at the target level (2% in most developed countries).