Institutional investors are not expected to reach their overall annual target returns of 7% to 8% over the next 10 years, according to a report from the BNY Mellon Investment Strategy & Solutions Group.
The report derived an expected return of 7% for U.S. large-cap stocks and similar risk-adjusted returns for small- and midcap stocks annually over the next 10 years. International equity returns are expected to be similar but with greater risk due to currency exposure.
For fixed-income investments, BNY Mellon expects real cash rates to increase to about 1% in 10 years. Inflation is expected at 2.5% per year, resulting in a 3.5% expected yield for 10-year Treasuries in 10 years and causing long-term Treasuries to provide a negative real return over the 10-year period because of increased yields coupled with inflation.
The report expects real corporate earnings growth in the U.S. will be about 2% per year, significantly vs. a consensus 6%. Over the long term, real corporate earnings have grown around 2.5%, but that has increased to more than 6% in the last 20 years.
“This low-growth expectation is based on our belief that real earnings growth cannot exceed real GDP growth over the long run,” according to the report titled, “10-Year Capital Market Return Assumptions.”
The only asset classes expected to exceed 10% annual returns in the next 10 years are U.S. private equity, 11.75%, and global private equity, 10.5%.
A report from the London Business School and Credit Suisse released Tuesday said annualized real returns for worldwide equities are expected to be 3% to 4% over the next 20 to 30 years, while the real return for bonds will be less than 1%.