Key Takeaways
- The best use case for investors for experts’ forecasts for stock and bond returns is if you have some savings target where you have a 10-year horizon.
- Most investors, if they’re listening to forecasts that are short term, for the next year or the next three years, it’s good entertainment, but I probably wouldn’t take it to the bank in terms of using it to plug into any forecasting or any planning that I was doing.
- Some investors might use historical stock and bond returns for their financial planning rather than looking at those forward-looking capital market assumptions. The trouble with historical market returns is that they can kind of ebb and flow based on what the market’s done in the recent past. So it’s an OK place to start. It is important to refine it a little bit by thinking about where we are now with dividends and valuations and all of those sorts of factors.
- For fixed-income return expectations, it’s pretty straightforward, where starting yields are a very good predictor of the total return that you’re likely to have from bonds. And the key reason is that if you hold a bond, the main constituent of your total return is going to be that income. With equities, there we see more variation in terms of the forecast, but most use some combination of equity valuations.
- A couple key takeaways from this year’s roundup of market forecasts is that a couple of firms are actually predicting better returns from fixed income than US equities over the next decade, and the higher return expectation for international equities versus US.
- Many of these firms have been expecting better returns from those non-US companies than US companies for a while, but it seems that US stocks have continued to outperform. Investors should not expect them to come to fruition within a couple of years because theses are 10-year forecasts.
Margaret Giles: Hi, I’m Margaret Giles with Morningstar. There’s no shortage of people prognosticating about the market’s future direction, but should you bother listening? Joining me to share some perspective on that question is Christine Benz. Christine is Morningstar’s director of personal finance and retirement planning, host of The Long View podcast, and author of the bestselling book, How to Retire: 20 Lessons for a Happy, Successful, and Wealthy Retirement. Thanks, for being here, Christine.
Christine Benz: Margaret, it’s great to see you.
How Investors Should Use Market Forecasts
Giles: All right. So every year, you pull together experts' forecasts of stock and bond returns. How would you suggest that investors use that information?
Benz: Well, the best use case is if you have some savings target where you have a 10-year horizon. So say I’m thinking I’m going to retire in 2035, and I’m using some kind of calculators to see what my balance will look like 10 years from now. Well, I can plug in those return expectations to help me come up with an expectation of what my portfolio might look like, and that also might help inform how much saving I need to do. In the meantime, if those market return expectations are looking low, I’d want to be a little bit more aggressive with my own savings to make up for that. And then I think they’re just good food for thought, even if you don’t have that time horizon that perfectly aligns with that 10 years. It’s something that you could use if, say, you’re retired and you’re trying to figure out, well, with my withdrawal, should I take my foot off the gas with respect to safe withdrawal rates, or can I charge ahead and maybe take more than that 4% that people have often heard about? So I think it can be good food for thought in that respect as well.
Why Longer Time Horizons Are More Helpful When Looking at Market Forecasts
Giles: Absolutely. So you mentioned that 10-year period. Why do you think a longer time horizon is generally more helpful than a really short time horizon?
Benz: Well, I think generally speaking, investors have goals that are longer, so 10 years or even longer rather than a three-year goal or a five-year goal. And then the other key reason is that I’m just not sure that those very short-term return forecasts are very good—that there’s so much noise in the marketplace, it’s very difficult to predict what stocks and bonds might do; maybe a little easier for bonds, but very difficult to predict what stocks might do in the short term. So I would suggest that most investors, if they’re listening to forecasts that are short term, like for the next year or the next three years, it’s good entertainment, but I probably wouldn’t take it to the bank in terms of using it to plug into any forecasting or any planning that I was doing.
Why Historical Stock and Bond Market Returns Are Only a Starting Place for Financial Planning
Giles: OK, so some investors might use historical stock and bond returns for their financial planning rather than looking at those forward-looking capital market assumptions. So is that a valid way to go about that?
Benz: I think it is for people who have a long time horizon. The trouble with historical market returns is that they can kind of ebb and flow based on what the market’s done in the recent past. We’ve had a 15-year bull market, so people looking at historical returns today will see some pretty elevated numbers, and it might not be safe to just plug in those return expectations and assume that we’ll continue to have that. In fact, there’s a little bit of a kind of an inverse relationship where if stocks are way up and historical market returns are elevated, valuations may be way up as well and that would tend to depress your future returns that you could expect. So it’s an OK place to start, but I like the idea of refining it a little bit by thinking about where we are now with dividends and valuations and all of those sorts of factors.
Similarities Between Different Providers' Stock and Bond Forecasts
Giles: So you surveyed an array of providers for the article. Are there any similarities in how they come up with these forecasts?
Benz: Definitely. Now they all do vary a little bit, but for fixed-income return expectations, it’s pretty straightforward where starting yields are a very good predictor of the total return that you’re likely to have from bonds, and the key reason is that if you hold a bond, the main constituent of your total return is going to be that income. And so yields are very predictive, and we tend to see a lot of convergence among the various investment providers that do these capital markets assumptions. They’re all kind of singing from the same hymnal because they’re all looking at the same thing, where yields are today. With equities, there we see more variation in terms of the forecast, but most use some combination of equity valuations. So expectation of price/earnings multiple, expansion or contraction, where dividend yields are today on stocks, and also earnings growth—what expectation they have for earnings growth. Some firms, including in my survey, I would call out like research affiliates, they tend to be more valuation sensitive, so that gets a bigger weighting in the forecast. But they generally all do focus on those three key variables.
Key Takeaways from the Market Outlook for 2025
Giles: OK, so what are some of the key takeaways from this year’s roundup?
Benz: One interesting thing, Margaret, is that a couple of firms are actually predicting better returns from fixed income than US equities over the next decade. So I think that’s the first time I’ve seen that in this roundup, but it’s a function of the fact that fixed-income yields have elevated nicely and equity valuations have continued to be on the high side. So that was one that jumped out at me. Another one which has been more persistent, which is the higher return expectation for international equities versus US. This is something that we’ve been seeing for like five years now, and we continue to see it very much in the data.
Why Investors Should Diversify Internationally Despite US Stocks' Outperformance
Giles: OK, so many of these firms have been expecting better returns from those non-US companies than US companies for a while, but it seems that US stocks have continued to outperform. So what should investors take away from the fact that these professional investors haven’t been vindicated yet?
Benz: Yeah, I think yet is the key point there. These are 10-year forecasts, so I don’t think anyone should expect them to come to fruition within a couple of years. You need the whole decade to wait and see for it to play out. So I would say patience is warranted. I think that our team at Morningstar, as well as a lot of external parties, still do point to the more attractive valuations overseas as a key accelerant for better market returns there, but it certainly hasn’t materialized yet, and there has been an opportunity cost for US investors if they’ve stayed diversified internationally. They have had less attractive returns from their non-US positions certainly than their US, so we have to acknowledge that, too.
Giles: Absolutely. Well, Christine, this has really helpful to have some context to the forecast. Thanks for being here today.
Benz: Thank you so much, Margaret.
Giles: All right. I’m Margaret Giles from Morningstar. Thanks for watching.
Watch 7 Ways to Maximize Your IRA in 2025 for more from Christine Benz.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
