Keeping an Eye on Future Returns
Kiplinger's Personal Finance|December 2020
Here’s what experts see ahead—and way ahead—for the performance of stocks and bonds.
Anne Kates Smith

FINANCIAL MARKETS HAVE been good to investors for the past decade. But today, the consensus of expert opinion is to expect returns that are lower than we’ve been used to, over the next several years. Of course, such forecasts can be way off the mark. But you need to assume some future returns in order to estimate whether your investment mix will support the future life you want within the time frame you’ve allotted.

Long-term forecasts don’t necessarily have a long shelf life. They’re revised regularly as market conditions change, producing ripples of change in future returns. And you should beware of making apples-to-apples comparisons using forecasts from different sources, as the market proxies and assumptions that firms use to make forecasts often vary. With those caveats in mind, here’s a sampling of what experts expect from financial markets over the coming half-decade and beyond.

Next five years. The soothsayers on the Capital Market Assumptions team at Northern Trust Asset Management expect moderate U.S. economic growth of 2.1%, on average, over the next five years, while interest rates remain low and inflationary forces are checked by productivity-boosting technology and automation. They expect stocks to deliver mid-single-digit returns. A mix of elevated valuations, modest global growth, lower profit margins, and a growing focus on corporate stakeholders who are not shareholders (think employees, communities, and even the environment) will subdue returns, according to the bank. The forecast calls for U.S. stocks to return 4.7% annualized, including dividends. You might get 5.4% annualized in European shares and the same from emerging-markets stocks says Northern Trust.

A big risk to the forecast is a resurgence in inflation, says chief investment strategist Jim McDonald. “That could upset the low-rate environment underpinning the stock market,” he says. For now, he sees an annual inflation rate of 2% over the next five years.

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