Market Outlook

Capital Market Assumptions
Five-Year Perspective

Heading into 2022, valuations for most asset classes appeared full—particularly, equity market multiples. The unprecedented fiscal stimulus during the coronavirus pandemic has diminished, and our real gross domestic product forecasts reflect a muted global economic outlook. However, we believe the cyclical earnings recovery still has room to run, and our five-year equity return expectations are generally stable to slightly higher versus 2021. 

The T. Rowe Price Five-Year Capital Market Assumptions Were Calculated Based on Data as of December 31, 2021.

T. Rowe Price’s capital market assumptions are best understood as forecasts of the central tendency of forward returns. We do not seek to predict actual or realized returns, as there is bound to be material variation around this central tendency in any given historical or future period. For this reason, our approach to portfolio construction relies on multiple optimization methods and robustness checks.

Heading into 2022, valuations for most asset classes appeared full—particularly, equity market multiples. The unprecedented fiscal stimulus during the coronavirus pandemic has diminished, and our real gross domestic product forecasts reflect a muted global economic outlook. However, we believe the cyclical earnings recovery still has room to run, and our five-year equity return expectations are generally stable to slightly higher versus 2021.

Range of U.S. Economic Forecasts for the 5-Year Period Ending 2026
Range of U.S. Economic Forecasts for the 5-Year Period Ending 2026

Source: Bloomberg Finance L.P.

Continued economic growth and inflationary pressures could negatively impact fixed income assets. Across the government yield curves we cover, we expect interest rates to rise over the next five years, with the duration impact felt most sharply in government bond indexes. Total returns of less than 1% are possible, and some may dip into negative territory. We expect the U.S. yield curve to shift 100 to 150 basis points (bps) higher by the end of 2026 and to flatten overall. This curve movement contributes to relatively muted return expectations for multi-asset portfolios relative to recent history.

Comparison of 2022 and 2021 Return Forecasts
Comparison of 2022 and 2021 Return Forecasts

EM refers to Emerging Market.

Source: T. Rowe Price. January 2022.

This information is not intended to be investment advice or a recommendation to take any particular investment action. The forecasts contained herein are for illustrative purposes only and are not guarantees of future results. Forecasts are based on subjective estimates about market environments that may never occur. See Methodology section of the full report for additional information. 

Within U.S. equities, we expect moderate earnings growth to be tempered by inflation and wage pressures. Valuation compression could detract from performance, as discount rates rise along with the U.S. Treasury yield curve. We expect return differentials between U.S. large- and small-cap equities to be driven primarily by valuations retracing, with large-caps faring better over our time horizon.

Globally, given our forecast for modest earnings growth and a slight contraction in valuations, we expect five-year equity total returns that would rank in the bottom third of realized returns historically. We expect emerging market (EM) equities to outperform developed markets, reflecting a lagged recovery from the pandemic in many EM countries. Our expectations for eurozone, UK, and Japanese equities also generally outpace the U.S.

In global credit markets, we expect that credit spreads for investment-grade and high yield corporate debt will widen slightly in developed markets. However, we expect this trend to have a relatively muted impact on returns. A stronger economic backdrop and higher interest rates may relieve some of the downward pressure on spreads.

Our forecasts for alternative investment strategies generally have improved relative to our 2021 outlook. Our slightly more bullish expectations for public equity markets carries through to our return forecasts for alternative asset classes that have some structural equity beta. Increased return dispersion also could create greater opportunities for active management to add value, leading to higher return expectations for asset classes like hedge funds and private equity.

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T. Rowe Price Capital Market Assumptions: The information presented herein is shown for illustrative, informational purposes only. Forecasts are based on subjective estimates about market environments that may never occur. This material does not reflect the actual returns of any portfolio/strategy and is not indicative of future results. The historical returns used as a basis for this analysis are based on information gathered by T. Rowe Price and from third-party sources and have not been independently verified. The asset classes referenced in our capital market assumptions are represented by broadbased indices, which have been selected because they are well known and are easily recognizable by investors. Indices have limitations due to materially different characteristics from an actual investment portfolio in terms of security holdings, sector weightings, volatility, and asset allocation. Therefore, returns and volatility of a portfolio may differ from those of the index. Management fees, transaction costs, taxes, and potential expenses are not considered and would reduce returns. Expected returns for each asset class can be conditional on economic scenarios; in the event that a particular scenario comes to pass, actual returns could be significantly higher or lower than forecast.

Key Risks

Forecasts are based on subjective estimates about market environments that may never occur. Some of the factors that could impact these forecasts include, but are not limited to:

  • Political and economic conditions 
  • Performance of financial markets
  • Interest rate levels
  • Changes to laws or regulations

Investments in equities are subject to the volatility inherent in equity investing, and their value may fluctuate more than investing in income-oriented securities. Certain asset classes are subject to sector concentration risk and are more susceptible to developments affecting those sectors than broader classes. Investment in small companies involves greater risk than is customarily associated with larger companies, since small companies often have limited product lines, markets, or financial resources. Transactions in securities denominated in foreign currencies are subject to fluctuations in exchange rates, which may affect the value of an investment. Debt securities could suffer an adverse change in financial condition due to a ratings downgrade or default, which may affect the value of an investment.

Investments in high yield involve a higher element of risk. Investments in less developed regions can be more volatile than other, more developed markets due to changes in market, political, and economic conditions. Investments are less liquid than those that trade on more established markets.

Bloomberg® and Bloomberg Indices are service marks of Bloomberg Finance L.P. and its affiliates, including Bloomberg Index Services Limited (“BISL”), the administrator of the index (collectively, “Bloomberg”) and have been licensed for use for certain purposes by T. Rowe Price. Bloomberg is not affiliated with T. Rowe Price, and Bloomberg does not approve, endorse, review, or recommend T. Rowe Price Capital Market Assumptions. Bloomberg does not guarantee the timeliness, accurateness, or completeness of any data or information relating to T. Rowe Price Capital Market Assumptions.

Important Information

This material is being furnished for general informational and/or marketing purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, nor is it intended to serve as the primary basis for an investment decision. Prospective investors are recommended to seek independent legal, financial, and tax advice before making any investment decision. T. Rowe Price group of companies, including T. Rowe Price Associates, Inc., and/or its affiliates, receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.

The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation, or a solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.

Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources’ accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date written and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.

T. Rowe Price Associates, Inc., and T. Rowe Price Investment Services, Inc., 100 East Pratt Street, Baltimore, MD, 21202, which are regulated by the U.S. Securities and Exchange Commission and Financial Industry Regulatory Authority, Inc., respectively. For Institutional Investors only.

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