Navigating a new economic era: 2025 Long-Term Capital Market Assumptions

A new economic era is emerging.

The post-global financial crisis world of low growth, low interest rates and low capital investment is gone. A healthier economy is taking shape, with the potential to deliver higher growth, higher rates and strong capital investment. “Fiscal activism” (increased government investment) has overtaken the “monetary activism” (aggressive monetary policy) of the 2010s.

That’s the backdrop for the publication of our 2025 Long-Term Capital Market Assumptions (LTCMAs). These are our annual return and risk expectations for more than 200 assets and strategies over the next 10 to 15 years. The research reflects the work of more than 100 investment professionals from across J.P. Morgan Asset & Wealth Management.

The LTCMAs form a critical foundation of our asset allocation decisions, which in turn powers the asset allocation tools we use to advise our clients’ wealth plans.

Asset allocation is the single most important decision a long-term investor will make, and it can be the difference between reaching goals and falling short.¹ Even experienced investors may expect future market performance to mirror past returns. The result, all too often: missed opportunities and misaligned portfolio allocations.

Simply put: It is critical to take a thoughtful forward-looking view—as our LTCMAs do—to see the opportunities and risks ahead.

As a new economic era unfolds, it is a good moment for you to step back and consider your options. If you have a wealth plan, check to see if the past year’s strong performance has shifted your strategic asset allocation. Rebalancing may be in order. If you don’t have a wealth plan, now is a good time to connect with your advisor and develop one.

Here we examine the economic and market forces driving our long-term view, our expectations of how they might impact portfolios, and how to think about stress testing your goals-based wealth plan to help support resiliency in the years ahead.

Higher growth, higher rates—and potential for solid returns

The LTCMA macroeconomic outlook sees a healthier foundation for long-term returns across public and private markets.

We anticipate stronger growth ­— in our forecast, G7 nominal growth rises for fifth year in a row, to 3.9%. Our global inflation forecast falls from 2.9% to 2.6%, although long-term structural forces still leave inflation slightly higher than before the pandemic. 

We also project higher inflation volatility as governments spend more money pursuing expansive fiscal policy. With it will likely come greater volatility in short-term stock-bond correlations – a symptom of the expected tug-of-war between inflation risk and growth risk.

Higher growth typically means higher cycle-neutral cash rates,² as monetary policy reflects the economic growth environment. Our U.S. cash return assumption rises from 2.9% to 3.1%.

Rising capital investment (by businesses and governments) and improved productivity contribute to our growth forecast. We boost our developed market forecast 20 basis points (bps) to account for increased adoption of AI, which will especially help drive U.S economic growth. Our U.S. real GDP forecast rises from 1.8% to 2.0%. We downgrade our China real growth forecast to 3.6% and upgrade India, the fastest-growing country in our LTCMAs, to 5.9%.

Our growth outlook broadly supports equity and fixed income returns. Yet markets have already priced in some of those growth expectations. In other words, along with a healthier macroeconomic foundation, this edition of our forecast begins from higher starting points. After world equities rose 17% in the first three quarters of 2024,³ valuations moved higher. Credit spreads tightened as well.

Key considerations for asset allocation and portfolio diversification

What does our long-term forecast mean for portfolios?

Not for the first time, cash has the lowest return assumption.

Despite elevated valuations and higher starting points, global equities’ expected return of 7.1% for a USD investor falls only slightly from 7.8% in last year’s LTCMAs. The cyclical starting point is less of a concern in ex-U.S. developed markets, such as the UK and the euro area, where prevailing P/E ratios remain low.

In our forecast, U.S. large cap returns decline just 30 bps, to 6.7%. That modest drop reflects our increased confidence on two important fronts:

• High quality U.S. corporations protecting profit margins
• Wider adoption of AI across sectors beyond technology

In our LTCMAs, we believe bonds may once again provide the portfolio benefits of income and diversification.

The LTCMAs suggest the potential for healthy returns from government bonds. Our LTCMAs project a 4.2% return from both the 10-year U.S. Treasury, and the 10-year U.K. Gilt and a 3.3% return from the benchmark sovereign bond in the euro area. However, fiscal activism suggests higher government bond volatility along with steeper yield curves. Although the duration premium (the reward for taking on interest rate risk) declines vs. 2024, we believe it remains an attractive opportunity. 

While bonds cannot protect a portfolio from inflation shocks (as investors were painfully reminded in 2022, when both stocks and bonds fell steeply), bonds can help mitigate the impact of an economic growth shock. That’s why fixed income remains a useful source of portfolio diversification.