Capital Market Assumptions 2025

5 key findings 

A more favourable growth outlook for the next decade compared to last year’s assumptions, albeit with greater uncertainty regarding inflation which is set to remain slightly above central bank targets, results in higher expected returns across the spectrum of asset classes covered. Expectations have been revised upwards for regional equity markets and private assets in particular, with Private Equity, Infrastructure, and European equities showing the strongest improvements.

Risk/Return Trade off

The capital market line has steepened and partially shifted upwards compared to last year, driven by higher expected returns for riskier assets. Hedge Funds, Emerging Market Bonds, and Global Private Debt are particularly appealing in the medium volatility spectrum, while Global Private Equity stands out for investors looking to enhance returns with illiquid assets.
 

Return Contributions

A more supportive financial outlook leads to enhanced EPS growth estimates particularly for developed markets, while return expectations are higher for emerging market equities on the whole. Changes in valuations have mostly been marginal with respect to last year, with notable positive adjustments in EM and especially China, while valuation pressures continue to weigh on the US. The outlook for European equities is also positive, driven by stronger earnings growth and favourable valuations, bolstered by significant dividend yields.
Expectations for government bonds generally improved, supported by more favourable starting yields reinforced by anticipated higher average carry, and more attractive future valuations. This revision also favours credit markets, counteracting some of the negative contribution from the expected widening of credit spreads, with positive albeit modest improvements in return expectations. The overall outlook for fixed income credit assets is positive, particularly for the IG segment and EM bonds.
 

Euro-based investors with a moderate risk exposure can expect annual returns of 4.4% over the next decade, increasing to 4.9% when including real and alternative assets, while US dollar investors with the same profile can anticipate returns of 5.6-6%. Although the Global Aggregate remains a key component of the strategic asset allocation, its weight has decreased as more rewards are anticipated from risky assets.
For dynamic risk investors, return expectations increase significantly, ranging from 5.6% to 6.2% for EUR-based investors and 6.8%-7.3% for USD ones. The bond allocation to target these levels of risk and reward decreases in favour of equity, while maintaining a tilt towards opportunistic fixed income like Global High Yield and Emerging Market Bonds.
 

The macroeconomic scenario that frames our Capital Market Assumptions explores several important game changers: from the rise of nationalism and increasing geopolitical fragmentation, to the transformative effects of artificial intelligence’s adoption, and global shifts in demographics between developed and emerging markets.

Growth and inflation paths

The gradual implementation of climate policies and AI-driven productivity gains will support growth across developed markets over the next decade, while emerging ones will benefit form the rise in Asia's tach leadership and Africa's demographic advantage. Transition-driven inflation may take a back seat in the near term, but technological and national security concerns may support demand for commodities, driving up prices. Food security and climate-related concerns may cause additional price pressures.

Exploring long-term themes currently at play – like the resurgence of fiscal spending and its impact on long-term interest rate dynamics and the transformation of Europe’s competitiveness – provides an even more comprehensive understanding of the key dynamics shaping the path ahead.