Stocktake: Forecast annual stock return for the next 10 to 15 years leaps to 7.9%

2022 has been a stressful year for investors, but there is a silver lining – the outlook for long-term returns is the strongest since 2010.

“Headwinds from low yields and high valuations have dissipated or even reversed, and asset return forecasts might be considered ‘back at par’,” says JPMorgan in its 2023 Long-Term Capital Market Assumptions report. With bonds no longer looking like “serial losers”, a standard 60:40 US stock-bond portfolio potentially offers annual returns of 7.2 per cent over the next 10 to 15 years, up from last year’s lowly 4.3 per cent estimate.

As for stocks, it’s not all good news. Profit margins remain near record highs and are expected to fall.

Still, sectoral shifts mean margins should remain high relative to history. Despite margin pressures, the normalisation of valuations means US stocks are now priced to deliver long-term annualised returns of 7.9 per cent, up from 4.1 per cent a year ago.

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Similar dynamics mean a brighter outlook for European and other developed market stocks, with high single-digit stock market returns forecast for the next 10 to 15 years.

Of course, there may well be short-term pain ahead for investors – who knows? Still, for anyone with a long-term horizon, the road ahead looks much brighter than 12 months ago.