Higher Expectations

After a brutal April of stock and bond losses, I glanced at the May asset-class return outlook from Vanguard Group. Many investors and pro-money managers scoff at such forecasts., for good reason – they are notoriously off in their estimates for the years ahead. I partially agree with that take for the equity side of the ledger, but, for bonds, we have a decent handle on what to expect.

Where Bond Yields Stand: YTMs

Consider that the best gauge of future fixed-income return expectations is simply the current yield to maturity. For the aggregate U.S. bond market, that stands at about 3.5% right now. For higher-duration investment-grade corporates, that’s 4.3%, while credit-risky junk bonds offer a yield near 7%. Short-term Treasuries, as I’ve written about in the past, provide a default-risk-free rate of return near 2.7% (with a small degree of interest rate risk).

Future Inflation: Forwards

Meanwhile, forward inflation swaps suggest 3.23% inflation over the coming five years and 2.51% in the five years after that. The future 10-year annual rise in consumer prices is above the historical average rates of the past 20-plus years. Those numbers are the best gauge we have of what inflation might be. If you disagree, go out there and trade some inflation swaps.

Stock Returns: Pick a Number?

So those figures are all market-based. Stock market return forecasts, however, are on more shaky ground. Vanguard’s 10-year annualized nominal return projections lay out a bearish case for U.S. large-cap growth stocks (as of April 30, 2022). The mutual fund company expects that style to return about minus 1% before inflation. Vanguard is actually optimistic on the inflation front — predicting C.P.I. to run near or just above 2% over the next decade, bucking what traders see via the swaps market. I’d go with the market, not the forecasters, on that one.

Vanguard Capital Market Expectations


Vanguard slightly favors small-caps over large-caps, but certainly prefers value stocks to growth. Like so many forecasts from years past, May’s capital market outlook outlines a bullish case for foreign equities. That’s where they lose so many investors, since that prediction has been way off year after year. As for bond returns, projections are close to where current yield to maturities are, so I’m on board with that. Though I’d assert that their ~3% outlook on U.S. high-yield corporates and emerging market bonds is far too low based on current market pricing. Vanguard also sees TIPS, a popular asset right now, delivering a return significantly below the future inflation rate.


All these figures, of course, should be taken with a grain of salt. They are useful for advisors in the sense that taking a step back to think about a longer time horizon is always a good thing. Particularly when the VIX is above 30 and there are so many short-term risks out there (as there always are).

Mike Zaccardi, CFA, CMT

Investment Writer, Zaccardi LLC