Capital Market Assumptions Suggest Stretched Equity Valuations

For at least the next decade, plan sponsors will likely have to navigate an environment in which largely positive macroeconomic conditions are countered by high equity valuations.

Capital market assumptions published this year by both Capital Group and J.P. Morgan Asset Management suggest that to make equity returns for participants easier to earn in the long run, diversification and active management may matter more than ever.

Jayme Colosimo, an investment director for capital strategy research at Capital Group, explains that CMAs act as a “foundational input” for multi-asset investments—such as the target-date funds that capture most DC plan inflows.  

The CMAs are intended to give plan sponsors a “long-term road map” that “eliminates the short-term noise we all navigate through in the markets,” Colosimo says. They try to ensure that the design of the solutions selected by plan sponsors “stay aligned” with anticipated future outcomes.

Projections and Strategies

Capital Group stated in a recent white paper that U.S. equities are projected to deliver a long-term return of 6.1% over 20 years, compared with the 6.3% the firm projected last year. JPMAM, which forecast returns over a 10-to-15-year investment horizon, predicted a 60/40 stock-bond portfolio would deliver a long-term return of 6.4%, unchanged from last year.

Last month, Vanguard forecast subdued long-term prospects for U.S. equities. The firm anticipated annualized returns of between 3.9% and 5.9% over the next 10 years.

Colosimo explains that lower equity returns—despite solid corporate earnings growth and stable inflation assumptions—can be attributed to stretched valuations.

As U.S. equity markets become increasingly concentrated in a small number of large firms, traditional passive management strategies may expose portfolios to greater risk, according to the J.P. Morgan report. The firm stated that passive U.S. large-cap stock benchmarks are more concentrated than ever and “exhibit a strong momentum bias style.” JPMAM stated that other forms of passive investing, including equal-weighted or fundamental strategies, may be too extreme in reducing market concentration and may also result in an unwanted value bias.

For both equities and fixed income, however, active management may help mitigate risks, enhance yield and take advantage of market opportunities that passive strategies may miss. JPMAM’s report stated that an active manager can “de-concentrate” portfolios while maintaining targeted exposure to compelling themes, sectors or securities.

Colosimo says the long-term outlook for fixed-income investments is positive.

“After a decade of near-zero yields, bonds are finally offering some meaningful long-term potential,” Colosimo explains.

Meanwhile, the outlook on bonds across the industry has not been entirely positive over the past year. In February 2025, Rick Rieder, BlackRock’s CIO of fixed income, wrote in a commentary that bonds were “no longer reliable” as a hedge against equity risk. Returns across 70,000 debt securities in 2024 were negatively correlated with duration and positively correlated with starting yield, he explained.

“The takeaway is straightforward,” Rieder wrote. “When hedging value is negative, and repayment schedules come with historically high certainty, fixed income investing today should prioritize income over interest rate risk.”

Recently, BlackRock sounded the alarm over bonds again.

“Bond markets have started 2026 in a bumpy fashion,” BlackRock analysts wrote in its weekly commentary on January 26, adding that with an anticipated increase in investment-grade debt issuance this year, “greater leverage can create vulnerabilities that expose the financial system to shocks like government bond yield spikes.”

An AI ‘Boom’ to Temper Valuations

JPMAM noted in its paper that while U.S. equity valuations and market concentration may present diversification challenges, the trends are driven by two positive factors: “robust earnings growth and sectorial leadership in technology and AI.”

The effect of artificial intelligence on the market as a whole remains to be seen. The tech-heavy Nasdaq Composite fell 1.4% on Tuesday, while the S&P 500 fell 0.8%, amid fears for the future of software companies following AI firm Anthropic’s release of an automation tool for lawyers. Chip-maker Nvidia fell nearly 3%.

Colosimo adds that AI could eventually act as a disinflationary force , however, reducing labor costs thanks to efficiency gains. Her firm’s paper suggested that increased automation could also offset the “economic drag” produced by shrinking workforces as the U.S. continues to experience the “Peak 65” trend of more than 4 million adults retiring each year through 2027.

Despite optimism due to AI advances, Capital Group also issued a warning.

“An important caveat remains— AI’s potential to reshape the labor force could also have negative impacts, triggering labor market disruptions and uneven job displacement, particularly among middle-income white-collar roles,” the paper stated.