Inflation has cooled from its peak but remains sticky and structurally more volatile, which has driven rapid shifts in rate expectations and made traditional stock-bond diversification less reliable. Additionally, recent geopolitical developments and market momentum are keeping investors cautious and on the sidelines.
That environment explains why cash feels safe—but excess cash quietly erodes purchasing power when inflation stays above target, and the cost of waiting compounds over time. The data consistently show that cash sits at the bottom of the real-return spectrum across most inflation regimes, and when stock-bond correlations flip positive (as they have in higher-inflation periods), even "balanced" portfolios with heavy cash allocations can underperform expectations.
While an environment of structurally higher inflation is our base case scenario, recent price pressures have been so far contained to energy with little passthrough to stickier services. Hence, there may be opportunities to capitalize on — or hedge against — higher inflation through uncorrelated assets such as infrastructure.
Clients often raise cash when the environment feels uncertain. The challenge is that what feels like “safety” can turn into a persistent performance headwind—especially when inflation remains above comfort levels.
This year markets have swung between optimism for the AI promise and fear of stagnant growth and geopolitical fragmentation. Rate expectations have repriced dramatically, and the consensus path for Fed policy has shifted from multiple cuts at the start of the year to a more uncertain posture that now includes the possibility of hikes. Policy uncertainty spiked alongside VIX earlier this year, and while both have started to stabilize, the memory of those moves keeps investors anchored in cash.
Rate repricing has been the clearest pressure valve: central bank expectations have risen sharply due to inflation concerns and geopolitical conflict, with significant moves priced across the Fed, ECB, and BoE. Market pricing no longer anticipates rate cuts by year-end. In that kind of environment, the instinct to wait for visibility is completely rational—but history shows that clarity usually arrives after the opportunity has already repriced. Yet diversifying into alternatives and income diversifiers allows investors to stay invested while potentially generating returns and preventing inflation erosion.
While clients focus on drawdowns and rate volatility, inflation is doing quieter but persistent damage to cash-heavy portfolios. The headline number has come down from its peak, but core measures remain above target—currently at 2.79% versus the pre-COVID average of ~1.8%. Both long-term capital market assumptions and market forward pricing suggest inflation settling around 2.30%, meaningfully above the prior cycle's average, with increased volatility anticipated due to structural forces.
Beyond short-term disruptions, sticky inflation still appears driven more by acyclical, supply-side factors than by demand reacceleration. That makes it harder for the Fed to "solve" with rate hikes alone—and means inflation can persist even as growth moderates. There are fears of a 1970s replay, but wage inflation is trending down, which suggests the current episode may be different in character even if it's persistent in duration.
In an environment of structurally higher — and more volatile — inflation, traditional asset classes may struggle to provide sufficient diversification and resilience. When inflation runs above 2%, stock-bond correlations have historically risen, eroding the diversification benefit of a traditional portfolio and increasing downside risk during market stress. The question for investors is how to manage that risk while maintaining portfolio income.
Infrastructure has historically served as a meaningful inflation hedge within the alternatives universe. Demand across power, transport, and digital networks tends to be durable across economic cycles, and the asset class has the potential to improve portfolio consistency when combined with a traditional 60/40 allocation.
The supply side reinforces the case. U.S. power demand has been growing at a notably fast pace — driven by electrification, data centers, and industrialization — while new capacity completion rates remain low and interconnection queues are long. That gap between demand and supply could persist through the end of the decade, potentially supporting both asset values and returns. Aging infrastructure compounds the need: dams, levees, water systems, and bridges all require significant capital investment, defense-related infrastructure spending is rising globally, and additional investment in transmission lines may be needed to unlock latent grid capacity.
The case for repositioning is fundamentally about recognizing a hidden trade-off. Cash provides psychological comfort in uncertain times, and that comfort is understandable given rate volatility and geopolitical risk. But comfort comes at a cost: excess cash slowly erodes purchasing power when inflation persists above target, and waiting for perfect clarity typically means missing the opportunity window. The data consistently show that investors who delay allocation decisions often find that repricing has already occurred. The relevant question, then, is not whether to act, but how to reposition deliberately and gradually—in a way that accounts for legitimate near-term risks while addressing the longer-term inflation erosion problem.
Infrastructure and real assets can offer a concrete mechanism for thinking about this trade-off. Their historical performance holds up across different inflation scenarios, and the underlying supply-demand dynamics—driven by energy transition, data center buildout, and aging infrastructure—appear likely to persist.
Alternative assets: Investment categories outside traditional equities and fixed income, including private equity, private credit, hedge funds, real assets and other strategies that often exhibit different risk, return and liquidity characteristics than public markets.
VIX Volatility Index: A measure of expected stock market volatility derived from S&P 500 option prices, often referred to as a gauge of market uncertainty.
JPMAM Long-Term Capital Market Assumptions
Given the complex risk-reward trade-offs involved, we advise clients to rely on judgment as well as quantitative optimization approaches in setting strategic allocations. Please note that all information shown is based on qualitative analysis. Exclusive reliance on the above is not advised. This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise of future performance. Note that these asset class and strategy assumptions are passive only—they do not consider the impact of active management. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Assumptions, opinions and estimates are provided for illustrative purposes only. They should not be relied upon as recommendations to buy or sell securities. Forecasts of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material has been prepared for information purposes only and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. The outputs of the assumptions are provided for illustration/discussion purposes only and are subject to significant limitations. “Expected” or “alpha” return estimates are subject to uncertainty and error. For example, changes in the historical data from which it is estimated will result in different implications for asset class returns. Expected returns for each asset class are conditional on an economic scenario; actual returns in the event the scenario comes to pass could be higher or lower, as they have been in the past, so an investor should not expect to achieve returns similar to the outputs shown herein. References to future returns for either asset allocation strategies or asset classes are not promises of actual returns a client portfolio may achieve. Because of the inherent limitations of all models, potential investors should not rely exclusively on the model when making a decision. The model cannot account for the impact that economic, market and other factors may have on the implementation and ongoing management of an actual investment portfolio. Unlike actual portfolio outcomes, the model outcomes do not reflect actual trading, liquidity constraints, fees, expenses, taxes and other factors that could impact the future returns. The model assumptions are passive only—they do not consider the impact of active management. A manager’s ability to achieve similar outcomes is subject to risk factors over which the manager may have no or limited control. The views contained herein are not to be taken as advice or a recommendation to buy or sell any investment in any jurisdiction, nor is it a commitment from J.P. Morgan Asset Management or any of its subsidiaries to participate in any of the transactions mentioned herein. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit and accounting implications and determine, together with their own financial professional, if any investment mentioned herein is believed to be appropriate to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yield are not a reliable indicator of current and future results
Understanding long-term estimates
Our investment management research incorporates our proprietary projections of the returns and volatility of each asset class over the long term, as well as estimates of the correlations among asset classes. Clearly, financial firms cannot predict how markets will perform in the future. But we do believe that by analyzing current economic and market conditions and historical market trends, and then, most critically, making projections of future economic growth, inflation, and real yields for each country, we can estimate the long-term performance for an entire asset class, given current and our estimated equilibrium levels. The “equilibrium” level shows the average or central tendency of a market or macroeconomic variable such as yield or credit spread that is expected to prevail over the long-term, because the level represents the value inherent in a given market. The return assumptions are based on our proprietary process of using a building block approach for each of the asset classes. For instance, the building blocks for equity consist of our projections on inflation, real earnings growth, dividend yield and the impact of valuations. The building blocks for fixed income consist of our projections for future yields and the change in bond prices. The estimates for alternatives are driven by our historical analysis and judgment about the relationship to public markets. It is possible—indeed, probable—that actual returns will vary considerably from this expectation, even for a number of years. But we believe that market returns will always at some point return to the equilibrium trend.
We further believe that these kinds of forward-looking assessments are far more accurate than historical trends in deciding what asset class performance will be, and how best to determine an optimal asset mix.
In reviewing this material, please understand that all references to expected return are not promises, or even estimates, of actual returns one may achieve. The assumptions are not based on specific products and do not reflect fees, such as investment management fees, oversight fees, transaction costs or other expenses that could reduce return. They simply show what the long-term return should be, according to our best estimates of current and equilibrium conditions. Also note that actual performance may be affected by the expertise of the person who actually manages these investments, both in picking individual securities and possibly adjusting the mix periodically to take advantage of asset class undervaluations and overvaluations caused by market trends.
For the purpose of this analysis volatility is defined as a statistical measure of the dispersion of return for a given allocation and is measured as the standard deviation of the allocation’s arithmetic return. The Sharpe ratio is a return/risk measure, where the return (the numerator) is defined as the incremental annual return of an investment over the risk free rate. Risk (the denominator) is defined as the standard deviation (volatility) of the allocation’s return less the risk free rate. The risk free rate utilized is J.P. Morgan’s long-term assumption for Cash. Correlation is a statistical measure of the degree to which the movements of two variables, in this case asset class returns, are related. Correlation can range from -1 to 1 with 1 indicating that the returns of two assets move directionally in concert with one another, i.e. they behave in the same way during the same time. A correlation of 0 indicates that the returns move independently of each other and -1 indicates that they move in the opposite direction.
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