10-Year Annualized Forecasts for Major Asset Classes

While there’s no way of predicting the future, quantitative models can help us come up with a general idea of how different asset classes may perform in the future.

One example is Vanguard’s Capital Markets Model (VCMM), which has produced a set of 10-year annualized return forecasts for both equity and fixed income markets. Visualized above, these projections were published on May 17, 2023, and are based on the March 31, 2023 running of the VCMM.

A key takeaway here is that Vanguard expects international equities to outperform U.S. equities over the next decade, noting:

"We believe that the valuation-based expansion in U.S. equities is sowing the seeds for lower returns in the decade."

A valuation-based expansion refers to the increase in a company’s market value, rather than its intrinsic value. In other words, Vanguard doesn’t believe that current U.S. equity valuations are justified, and that this will dampen performance over the next decade.

Vanguard also expects U.S. inflation to be contained over the next decade. The firm has confidence in the ability of central banks to keep inflation at their target rates (2% in most developed economies).

Cited reasons for international outperformance include more favorable valuations, higher dividend payout ratios, and a potentially weaker U.S. dollar.