2025 Capital Markets Assumptions
Asset class forecasts to help inform our strategic asset allocations.
Key Takeaways
U.S. equity return forecasts dropped, driven by declining P/E multiples and a more cautious earnings outlook.
Rising tariff risks have elevated the likelihood of stagflation or recession, but a soft landing is still possible.
Cash returns are expected to beat inflation, while fixed-income forecasts remain strong despite minor category shifts.
Our macro scenarios reflect our view that a hard landing for the U.S. economy looks increasingly likely, although a soft landing is still possible. Inflation forecasts and other key factors underpinning our medium-term (3- to 5-year) capital market assumptions (CMAs) for 2025 were formulated in April, before U.S. tariffs were announced. Due to the potentially large and far-reaching impacts of those tariffs, we may revise some of these assumptions later this year, depending on how events unfold.
Cash returns should remain ahead of inflation. Given today's yields, our forecast for returns on longer-dated bonds is still healthy.
We lowered our returns forecasts for all types of equities, reducing valuations for U.S. stocks and moderating our earnings outlook overall.
Lower P/E Multiples Reduce Our U.S. Equity Returns Outlook, So the Frontier Shifts Lower
We expect P/E multiples for U.S. large-cap stocks to decline over the next five years, reducing our (arithmetic average) return forecast to 6.50% compared to 7.25% last year. We expect multiples for U.S. small-cap and non-U.S. developed market equities to hold steady, raising their return outlooks above those for U.S. large- and mid-caps. Still, we expect U.S. growth stocks to deliver much stronger real earnings growth than U.S. value, U.S. small-cap or non-U.S. equities.
Our outlook for most fixed-income categories is little changed compared with 2024, except for U.S. high yield and Convertible bonds where we expect returns to be 0.50% and 0.75% lower. Our cash forecast rose 0.25%, while the average inflation expectation rose to 2.75% compared to 2.5% in 2024. Taken together, the forecasted average annual return to a portfolio of 60% global stocks/40% global bonds (with the U.S. representing 60% of both asset classes) for the next five years now stands at 6.04%, down from 6.40% in last year’s medium-term outlook.
Figure 1 | Stock-Bond Frontier Shows Returns Slightly Below Last Year’s CMAs
Global Stock/Bond Frontiers
Forecast represents American Century Investments’ view on asset class return and risk over the next three to five years as of April 2025. Opinions and estimates offered constitute our judgment and, along with other data, are subject to change without notice. Risk is represented by annualized standard deviation. Source: American Century Investments.
A Range of Inputs and Perspectives Contribute to Our Final Forecasts
Our capital markets forecasts are:
Based on economically sound and intuitive underpinnings.
Transparent with respect to the underlying assumptions.
Systematically developed and reviewed to reduce biases.
We use a range of techniques to construct the building blocks of our forecasts across asset classes. These building blocks, which include fundamental inputs such as inflation, cash, real yields, real earnings growth and more, form the basis for an internally consistent set of projections across more than 50 asset classes.
Our macro scenario modeling incorporates research on long-term economic drivers. These long-term drivers help us to identify the economic currents that could heavily influence the next five years. We then probability weight each scenario to develop a set of return expectations. Here, and in Figure 2, we briefly describe our current set of 5-year scenarios:
Soft Landing: Inflation drifts lower with moderate GDP growth, a continuation of the Fed’s actions of late 2024
Hard Landing: Relatively high short-term rates push inflation below target, but at the expense of GDP growth
Tech Shock: Led by advances in AI, productivity gains push GDP higher, increase earnings, and lower inflation
Policy Shock: Tariffs (U.S.-imposed and retaliatory) stifle growth and raise prices, causing stagflation or a recession
Climate Change: Extreme weather events require costly repairs, increase insurance rates, and hit food prices
Grey Economy: Demographics dominate, as an aging U.S. population spends less on consumer goods, travel, etc.
Figure 2 | A Range of 5-Year Macro Scenarios
Forecast represents American Century Investments’ view on asset class return and risk over the next 3-5 years as of June 2025. Opinions and estimates offered constitute our judgment and, along with other data, are subject to change without notice.
Figure 3 shows we reduced our return outlook for U.S. equities by 0.80% across all major categories. Note that this does not reflect the impact of tariffs announced in March-April 2025. We also lowered our return forecasts for non-U.S. core and emerging market equities by a smaller increment.
We expect returns from U.S. high yield bonds to moderate as spreads in that sector have been at historically tight levels that are unlikely to persist. The outlook for REIT returns is based on an uncertain demand environment.
Figure 3 | Key Asset Class Assumptions with Prior Year Comparisons
Forecast represents American Century Investments’ view on asset class return and risk over the next 3-5 years as of April 2025. Opinions and estimates offered constitute our judgment and, along with other data, are subject to change without notice.
Annualized Return and Volatility Forecasts Drive Our Efficient Frontier and Projections for Various Strategies
For an in-depth discussion of our methodology, please see our paper titled “Comprehensive Capital Market Assumptions .” Our long-term (20-year) CMAs are also available on request.
Data as of March 2025. Source: American Century Investments.
Returns are simulated based on capital market assumptions from ACI Multi-Asset Strategies’ medium-term forecasts (3-5 Years). Forecasts are not a reliable indicator of future performance. American Century Investments Capital Market Assumptions For each asset class, American Century develops a set of assumptions for return, risk, and correlation. Because asset class returns and relationships are ultimately grounded in economic fundamentals, we forecast over the equivalent of a complete economic and market cycle. We arrive at our return forecasts through various modeling techniques, such as a classic valuation approach, a risk-premium approach, and an historical risk and return analysis. In addition to this quantitative process, we employ a qualitative review, recognizing that there are elements that can’t be easily captured by a quantitative process. Further, the quantitative models require forecasting various inputs, which again may contain qualitative elements.
Capital market assumptions are not meant to reflect any projection or promise of performance. No guarantee or representation is being made that any account will or is likely to achieve the assumptions shown.
Drilling-Down to Components of Real Return Projections in Developed Market Equities
While U.S. large-cap growth stocks have been propelled higher in recent years by both earnings growth and high price-earnings multiples, going forward we expect valuation multiples to decline even as earnings remain healthy. We expect the average P/E multiple for U.S. large-cap value stocks to decline to a much lesser extent, and while we expect earnings growth for value stocks to be modest over the next five years, dividends should support the asset class.
We expect U.S. small-cap stocks to deliver earnings growth that exceeds that of large-cap value stocks, while their P/E multiples are likely to experience little change. Non-U.S. developed equities are projected to deliver returns similar to U.S. small caps, but those returns rely more heavily on dividends and less on EPS growth.
As noted previously, these projections were made before the U.S. announced significant tariffs would be imposed on imports from most other countries.
Figure 4 | Real Return Decomposition for Developed Equity Segments
Geometric Average
Data as of March 2025. Source: American Century Investments.
Returns are simulated based on capital market assumptions from ACI Multi-Asset Strategies’ medium-term forecasts (3-5 Years). Forecasts are not a reliable indicator of future performance. American Century Investments Capital Market Assumptions For each asset class, American Century develops a set of assumptions for return, risk, and correlation. Because asset class returns and relationships are ultimately grounded in economic fundamentals, we forecast over the equivalent of a complete economic and market cycle. We arrive at our return forecasts through various modeling techniques, such as a classic valuation approach, a risk-premium approach, and an historical risk and return analysis. In addition to this quantitative process, we employ a qualitative review, recognizing that there are elements that can’t be easily captured by a quantitative process. Further, the quantitative models require forecasting various inputs, which again may contain qualitative elements.
Capital market assumptions are not meant to reflect any projection or promise of performance. No guarantee or representation is being made that any account will or is likely to achieve the assumptions shown.
Authors
Senior Portfolio Manager and Head of Multi-Asset Research
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The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.
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