Markets are beginning to adjust to a new paradigm after two years of rising rates and persistent inflation. Our updated capital market assumptions reflect our view that growth will remain resilient but valuations will normalise given higher interest rate expectations.
Consider the past decade. Global equities delivered annual total returns of nearly 10%, while US equities returned more than 12%. Entering 2025, the S&P 500 has delivered gains exceeding 25% in each of the previous two years and valuations are reaching levels not seen since the dot-com bubble.
In addition, the correlation between stocks and bonds is the highest it has been since the early 1990s. Current market conditions suggest a reversal of fortunes.
We believe the next 10 years are likely to be defined by higher (more normal) yields alongside increased economic volatility and geopolitical uncertainty.
Those headwinds are potentially tempered by technology-led productivity gains and economic growth, likely driven by continued investment in infrastructure and opportunities presented by changing trade patterns.
Our view of rates is informed by this global growth outlook combined with inflation that remains above target. Inflation is likely to remain sticky given higher wages, a turn away from globalisation, geopolitical friction, and more elevated commodity prices.
This is reflected in our assumption of a 3.25% federal funds rate and ‘fair value’ of the 10-year treasury yield around 4.5%.
From our perspective, higher interest rates play an important role in driving expected returns across markets. Historic patterns show that initial valuation levels strongly influence subsequent performance.
Accordingly, we believe US equity valuations will be pulled lower, while fixed income will benefit from higher starting yields. By comparison, real assets appear more reasonably priced following a period of underperformance and are well positioned to generate substantially stronger returns.
Fixed income
The higher starting point for interest rates creates a strong foundation for fixed income returns. Though we believe the neutral Fed funds rate will be 3.25%, we project returns on treasuries of 4.6% over the next decade, roughly in line with starting yields.
A pro-business policy climate and a generally strong corporate environment create an attractive starting point for corporate credit. We project that investment-grade corporate debt returns will average 5.1% over the decade, with high-yield debt returning an average of 6.1%. These are modestly higher projections than we made last year, again based off more attractive yields today.
Given the non-linear nature of spread moves and the low level of the starting point, we acknowledge spreads could go intermittently wider during the 10-year window to reflect a rise in default risk. However, we believe the full-cycle fair value spread is not too far from today’s level.
Preferred securities led fixed income performance last year, driven by narrowing credit spreads and discounted valuations. Looking ahead, they remain well positioned, offering attractive yields of 6-8% among investment-grade options.
Considering last year’s spread compression, we are reducing our long-term outlook for preferred returns from 6.4% to 6.1%. While credit spreads are historically tight, strong fundamentals in the financial sector (particularly banks’ record capital levels and solid earnings) provide a stable foundation.
Equities
Global equity returns look poised to converge over the next decade, with non-US equities outperforming domestic equities. In the US, strong nominal growth should sustain revenue expansion, though margin pressure could weigh on earnings.
However, more importantly, some price-to-earnings (P/E) multiple compression suggests more modest returns of 5.8% annually, marking a significant decline from the 12.5% achieved over the previous decade. Investors should expect earnings growth and dividend yield to account for all of the realised total return.
International developed markets offer a different proposition. While these markets face headwinds from declining working-age populations and lower productivity, their higher dividend yields and more attractive valuations position them to exceed US equities – a notable shift from their historical underperformance.
We believe non-US developed market equities could achieve 7% average annual growth over the next decade.
Emerging markets are expected to continue underperforming, relative to non-US developed markets, in the coming years. Despite stronger GDP and earnings growth, a lower dividend yield and modest share dilution over time will likely weigh on prospective returns.
Even so, we believe emerging markets will close their performance gap with US equities in the coming decade, with average annual returns of 6.3% – though this will be primarily driven by the weaker pace of US market returns.
Real assets
Looking across the real assets categories, we expect opportunities to arise from supply/demand imbalances, particularly in markets where structural underinvestment intersects with accelerating demand from rising populations, energy transition and technological advancement.
Even without multiple expansion, current valuation levels appear reasonable. While there will be dispersion among real assets, we see a meaningfully better return backdrop going forward than has been the case for most of the period following the global financial crisis, when inflation surprised to the downside for over a decade.
Natural resource equities lead with expected returns of 8.4%, supported by commodity price strength, current valuations and strong free cash flow growth.
Global listed REITs and US-listed REITs follow closely, with projected returns of 7.8% each. Global property valuations have experienced a reset, and fundamental performance has continued to improve.
Global listed infrastructure is projected to return 7.6%. Infrastructure returns are supported by attractive starting valuations and growth potential, in part from ongoing electrification of industry and rapid data centre growth, as well as by their defensive characteristics in a more volatile macroeconomic environment.
Our commodities outlook of 5.9% average annual returns over the decade is supported by several long-term structural factors. Supply constraints stemming from years of underinvestment across many commodity sectors are coinciding with increasing demand pressures from energy transition initiatives and evolving geopolitical dynamics.
We expect gold to return 3%, in line with our long-term inflation forecast.
Jeffrey Palma is head of multi-asset solutions at Cohen & Steers. The views expressed above should not be taken as investment advice.