Vanguard, JP Morgan AM and Goldman: return expectations for the coming decade

JP Morgan Asset Management expects UK and European stocks to outperform US stocks over the next 10-15 years and government bonds to follow investment grade bonds.

The asset manager forecasts that large-cap US stocks will return 6.7% per year over the next 10 to 15 years in dollar terms, but for sterling investors, the currency implications will reduce their gains to 5. 9%. High valuations in the United States will weigh on returns by 1.8% over this long-term investment horizon.

On the other hand, the United States stands to benefit from migration, productivity gains driven by artificial intelligence (AI), and stronger economic growth through robust capital investment, technological advancements, and budget activism.

Still, JP Morgan Asset Management’s projections are more optimistic than those of Vanguard and Goldman Sachs, which also announced their forecasts last week.

Vanguard expects unhedged US stocks to return 4.2% in sterling terms over the next 10 years. Valuations are tight and stock prices are high relative to expected earnings, said Giulio Renzi Ricci, head of asset allocation for Europe.

Vanguard believes that U.S. value and small-cap stocks will significantly outperform growth stocks, reversing the momentum of recent years.

After recent exponential performance fueled by mega-cap tech and AI exuberance, growth stocks now look expensive and are expected to return just 0.1% to 2.1% on an annualized basis for the next decade, as l ‘illustrates the graph below.

Vanguard’s 10-year annualized nominal return and volatility forecast for U.S. stocks

Source: Avant-garde

Goldman Sachs expects the S&P 500 to return a meager 3% annually due to current high valuations and the extreme concentration of the benchmark index.

If market concentration were removed from the investment bank’s five-factor model, its return projection would increase to 7%, bringing its expectations in line with those of JP Morgan Asset Management.

This would be at the tail end of optimistic forecasts from 21 asset managers, as shown in the chart below. These managers’ 10-year return assumptions for U.S. stocks range from 4.4% to 7.4%, with an average of 6%.

Asset managers’ forecasts for 10-year annualized returns for U.S. stocks

Source: Goldman Sachs Global Investment Research

The 10 largest stocks in the S&P 500 now represent 36% of the index, meaning the U.S. stock market is near its highest level of concentration in 100 years.

A highly concentrated index reflects a less diversified set of risks and therefore will likely be more volatile, said David Kostin, chief U.S. equity strategist at Goldman Sachs.

The valuation premium for the top 10 S&P 500 stocks – many of which are very large-cap technology stocks – is the largest since the peak of the dot-com boom in 2000. They trade at a forward price-to-earnings ratio of 31x, compared to 19x for the other 490 shares.

Concentration could dampen long-term stock returns if the largest companies falter. Historically, it has proven extremely difficult for companies to maintain high levels of sales growth and profit margins over extended periods of time, Kostin said, particularly due to government regulation.

As a result, Goldman Sachs expects the equal-weighted S&P 500 to outperform its market-cap counterpart by eight percentage points over the next decade.

UK and Europe set to beat USA

JP Morgan Asset Management expects Eurozone stocks to be the best performers in the region, with annualized gains of 7.7% in sterling terms over the next 10 to 15 years. The UK will not be far behind with a rate of 7%, followed by emerging markets with a rate of 6.4% in sterling terms.

Overall, global stocks are expected to return 6.3% in sterling terms, with the US acting as a drag. Non-U.S. markets offer more attractive valuations and should benefit from currency appreciation, JP Morgan Asset Management strategists said.

Vanguard also expects global developed markets excluding the US to outperform and projects an even higher return of 7-9%. He estimates that emerging markets will generate a return of 5.7% to 7.7%.

Bonds versus stocks

Given its low expectations for the U.S. stock market, Goldman Sachs expects stocks to lag 10-year U.S. Treasuries over the coming decade, as shown in the chart below. below.

Likelihood of U.S. stocks outperforming government bonds and inflation, 2024-2034

Source: Goldman Sachs Global Investment Research

Vanguard believes, however, that the two asset classes will produce broadly similar results and forecasts that annual yields on U.S. Treasuries over the coming decade will be 4.2 to 5.2 percent, up from 3.2 to 5. .2% for US stocks.

Vanguard’s 10-year annualized nominal return and volatility forecast for U.S. fixed income

Source: Avant-garde

JP Morgan Asset Management forecasts a yield of 3% for intermediate US Treasuries, and 3.5% for long Treasuries, both in sterling. The manager expects more from stocks.

He also estimates that a 60/40 stock/bond portfolio should return 5.5% per annum in sterling terms over the next 10-15 years.

Government bonds versus corporate bonds

Government bonds are expected to provide good value for investment grade corporate bonds over the coming decade.

As the chart below shows, the risk premium for investment grade bonds is low, reflecting tight spreads. It has fallen since JP Morgan Asset Management released the Long-Term Capital Markets Assumptions (LTCMA) set last year.

Increase in yield (bonus)

Source: JP Morgan Asset Management

JP Morgan Asset Management expects 10-year gilts to return 4.2% and 15-year gilts to return 5%. Slightly higher yields of 5.2% are available for UK investment grade credit.

In Europe, 10-year government bonds are expected to yield 3.6% compared to 4.2% for European investment grade credit in sterling terms and 5.7% for European high yield credit.

Intermediate U.S. Treasuries are expected to yield 3%, compared to 4.2% for U.S. investment-grade credit and 5.3% for high-yield credit; all these figures are unhedged and are expressed in pounds sterling.

Vanguard estimates that emerging market sovereign bonds will top the rankings, between 5.6% and 6.6%.

JP Morgan Asset Management Return Assumptions for Fixed Income