Market Outlook

Capital Market Assumptions
Five-Year Perspective

Last year’s edition highlighted a number of challenges for financial markets, including the persistence of elevated inflation, a dramatic inflection in monetary policy, and delays to the resumption of normal economic activity in the wake of the COVID pandemic. These challenges, along with unanticipated risks—particularly Russia’s invasion of Ukraine—made 2022 a difficult year for investors. At the outset of 2023, financial markets still face near-term headwinds, but investors with a longer-term perspective have some room for optimism, in our view.

Based on data as of December 31, 2022.

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.

The primary market theme in 2022 was inflation, which spurred belated action from central banks followed by an immediate reaction from financial markets. Fixed income assets were the most direct casualties of tighter monetary conditions, as bond markets experienced their worst performance in decades. Additionally, as rates moved higher, equity multiples contracted, and risk assets generally underperformed.

At the outset of 2023, global inflation rates appeared to be either near or at their peaks, but uncertainty remained about the monetary policy courses to be followed by the major central banks and their effects on economic growth. The prospect of recession may warrant near-term caution, but we believe a longer horizon—like the five-year term of these forecasts—supports a more positive outlook for investors.

Range of U.S. Economic Forecasts for the 5-Year Period Ending 2027
Range of U.S. Economic Forecasts for the 5-Year Period Ending 2027

Source: T. Rowe Price

Inflationary pressures, which first appeared in the U.S., have spread across the globe. Underlying economic strength also has put pressure on central banks to rein in inflation by raising risk-free rates. Our forecasts for real gross domestic product (GDP) anticipate middling economic performance over the next five years. While we expect inflation rates to ease, high starting points result in levels that are above central bank targets across most economic regions. Overall, our global GDP growth forecasts remain positive, supported by strong economic fundamentals but sensitive to the ongoing monetary tightening cycle.

Comparison of 2023 and 2022 Return Forecasts
Comparison of 2023 and 2022 Return Forecasts

EM refers to Emerging Market.

Source: T. Rowe Price.

The forecasts contained herein are for illustrative purposes only and are not indicative of future results.

Our five-year expectations for equity returns are significantly higher versus last year’s CMAs. Globally, our baseline forecast foresees resilient nominal earnings per share (EPS) growth and moderate support for equity prices through multiple expansion. With the economic recovery and the monetary cycle further along in the U.S. relative to the rest of the world, our forecast includes slightly higher non-U.S. equity returns. Underlying EPS growth expectations are comparable across regions, but disparate starting valuations result in varied return estimates. In particular, we expect emerging market (EM) equities to outperform developed markets. Within the developed markets, we expect the return leaders to be the U.K., Europe ex-U.K., and Australia.

Fixed Income
In previous years, regional interest-rate environments were largely characterized by their similarities—subdued inflation, modest economic outlooks, and low policy rates. In contrast, our expectations this year are for more distinct, asynchronous regional cycles. The U.S. yield curve stands out as the outlier in our interest-rate forecasts, as we foresee a moderate decline in rates across the curve over the next five years. In other regions, we expect cash and short rates to remain stable or to fall moderately—with the exception of Japan, where we anticipate continued pressure on the Bank of Japan to keep short rates lower for longer. Long rates are predicted to rise across all non-U.S. regions. Generally, our investment professionals expect yield curves to steepen, as central banks complete their hiking cycles and economic activity picks up towards the end of our forecast horizon. However, higher starting rates and greater expected carry, on average, should provide a material cushion for investors. As a result, expected total returns for most fixed income asset classes are meaningfully higher than in previous years’ CMAs.

Our more bullish expectations for public equity and fixed income markets carry through to our forecasts for alternative asset classes. We expect healthy equity risk premia to benefit many alternative strategies that have structural exposure to equities. In addition, we forecast marginally higher return premia for credit, duration, and EM exposure compared to last year’s CMAs.

However, structural return premia opportunities are offset by lower expectations for alpha generation. While we still believe that alternatives offer rich opportunities for active management, we believe the strongest performance tailwinds over the next five years will come from beta and risk premia.

United States
Our U.S. forecast incorporates our expectation that the inflation cycle will peak in the near term, and that tailwinds for performance will return in the latter stages of our forecast horizon. Within U.S. equities, earnings growth is expected to remain resilient, on average, over the period. We expect valuations to rise disproportionately for U.S. smallcap equities, translating into higher returns relative to the U.S. largecap universe.

With the Federal Reserve approaching the end of its hiking cycle, our forecast sees the U.S. yield curve reversing its current inversion. We expect the short end of the curve to see the largest declines, with cash rates falling by 60 basis points (bps) and the 2-year Treasury yield declining by 140 bps. The long end of the Treasury curve is forecast to see more moderate declines of 20-50 bps, depending on the maturity.

The U.S. equity and fixed income backdrops support our strong expectations for multi-asset portfolio returns. Below, we present five forecast scenarios for returns from a 50% global equity and 50% global fixed income U.S. dollar-hedged portfolio, along with historical returns for five-year periods ended December 31, 2022, 2017, and 2012. Our five-year forecast is relatively bullish versus the historical periods shown, reflecting a more attractive starting point for valuations and yields.


The forecasts contained herein are for illustrative purposes only and are not indicative of future results. Past performance is not a reliable indicator of future performance. Representative indexes are MSCI ACWI (USD) and Bloomberg Global Aggregate Bond (Hdg USD) Index. Refer to page 18, "Methodology – Scenarios" for definition of Bear and Bull Markets.

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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 thirdparty sources and have not been independently verified. The asset classes referenced in our capital market assumptions are represented by broad-based 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 a particular scenario comes to pass, actual returns could be significantly higher or lower than forecast. Please see the full Report starting on page 12 for more details of T. Rowe Price Capital Market Assumptions methodology.

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.

Additional Disclosures

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.

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