2024 Capital Markets Assumptions
Asset class forecasts help inform our strategic asset allocations.
Key Takeaways
We expect a soft landing for the U.S. economy, with inflation moderating but staying above the Fed’s 2.0% target.
High valuations have caused us to lower our forecasts for equities, except U.S. small-cap stocks.
Cash returns should outpace inflation, with fixed-income forecasts remaining strong for 2024.
Our macro scenarios framework reflects a high probability of a soft landing ahead for the U.S. economy. We expect inflation to continue to moderate but stay above the Federal Reserve’s (Fed’s) 2.0% target over the next five years. These conditions underpin our medium-term (3- to 5-year) capital market assumptions (CMAs) for 2024.
Cash returns should remain ahead of inflation in the “higher for longer” regime. Given today's starting yields, our forecast for longer-dated bond returns is healthy.
High valuations caused us to lower our forecasts for equities while acknowledging the higher earnings power of U.S. growth stocks.
Mean-Reverting P/E Multiples Constrain Equity Return Forecasts, Shift Return Frontier Slightly Lower
Our expectation of lower P/E multiples by the end of the five-year period is the main driver for reducing our equity return forecasts. Only U.S. small-cap equities avoid this haircut across the broad global equity landscape. Meanwhile, U.S. large-cap equities, characterized by extreme concentration and high valuations, see their return forecast fall by 0.5% to an arithmetic average annual return of 7.3%. Robust earnings growth projections for U.S. growth stocks help to maintain a return forecast in line with U.S. value.
Our fixed-income forecasts are little changed compared with 2023, remaining compelling after 2022’s sell-off. Our cash forecast rose 0.25%, while the average inflation expectation fell to 2.5% compared to 3.0% in 2023. As a result, the forecasted average annual return to a combination of 60% global stocks/40% global bonds for the next five years now stands at 6.4%, down slightly from 6.8% in last year’s medium-term outlook.
Figure 1 | Stock-Bond Frontier Shows Solid Returns Slightly Below 2023’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 2024. 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.
Research Notes: Multiple Model Techniques Contribute to Our Final Forecasts
Our capital markets forecasts adhere to three key principles of our research process:
Economically sound and intuitive underpinnings.
Transparency to the underlying assumptions.
Systematic development and review to reduce biases.
With these principles in mind, we use diverse techniques to model the “building blocks” of our return forecasts across asset classes. These building blocks form the basis for an internally consistent set of projections across more than 50 asset classes.
Building blocks for our return forecasts include fundamental inputs such as inflation, cash, real yields, real and earnings growth. Before settling on the values for these key determinants, we evaluate possible outcomes using scenario-based analyses and historical behavior. We then broaden our approach to all asset classes, utilizing models appropriate to each.
Our macro scenario modeling framework incorporated our longer-term research into the major economic drivers over the next decade. While not direct inputs to our CMAs, these long-term scenarios aided in identifying six distinct potential economic paths over the next five years. We then applied probability weightings to each scenario to arrive at a set of return expectations under this modeling approach.
Figure 2 | 5-Year Macro Scenario Development
Figure 3 | Key Asset Class Assumptions With Prior Year Comparisons
Source for Figures 2 and 3: American Century Investments. Forecast represents American Century Investments’ view on asset class return and risk over the next three to five years as of April 2024. Opinions and estimates offered constitute our judgment and, along with other data, are subject to change without notice.
Accompanying Tables
Our soon-to-be-revised 2019 paper, “Long-Term Capital Market Assumptions,” provides a high-level description of our methodology. Our medium-term (3- to 5-year) CMAs are here, and our long-term CMAs are available on request.
Forecasts are not a reliable indicator of future performance.
Past performance is no guarantee of future results. Investment returns will fluctuate and it is possible to lose money.
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
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.
The information is not intended as a personalized recommendation or fiduciary advice and should not be relied upon for investment, accounting, legal or tax advice.
No offer of any security is made hereby. This material is provided for informational purposes only and does not constitute a recommendation of any investment strategy or product described herein. This material is directed to professional/institutional clients only and should not be relied upon by retail investors or the public. The content of this document has not been reviewed by any regulatory authority.