Schwab's 2025 Long-Term Capital Market Expectations

Markets are constantly evolving, and when it comes to investment planning, it's important to stay informed without being overly reactive. However, finding reliable long-term estimates, even for major asset classes, isn't always easy. That's where Schwab Asset Management's disciplined, data-driven approach comes in. We regularly update our Capital Market Expectations (CME) based on both quantitative analysis and qualitative insights from our senior investment professionals. These forecasts provide valuable perspective on how different asset classes—such as stocks and bonds—may perform over the next decade.

CMEs are nominal, meaning they include the impact of inflation; they are annualized, representing average yearly returns; and are calculated over a 10-year horizon, providing insight into potential market performance a decade into the future. All returns are expressed from a U.S. dollar perspective. Importantly, CMEs are based on representative benchmark indices rather than specific investment vehicles like exchange-traded funds (ETFs) or mutual funds. As a result, they don't account for costs such as fees or taxes.

Our 2026 outlook highlights the risks of elevated valuations and concentration in U.S. markets, the compelling diversification opportunities in international equities, and the continued potential in fixed income—where yields remain attractive despite recent interest rate reductions.

Persistent market imbalances—concentrated equity markets, high valuations, tight credit spreads, and a flatter-than-average yield curve—complicate the current investment landscape. While such imbalances can persist longer than expected, 2025 has demonstrated how quickly conditions can change. During the first half of the year, the "Magnificent 7" pulled back, international equities outperformed their U.S. counterparts, the dollar weakened, and the U.S. yield curve began to steepen. Though U.S. markets recovered in the second half, the fluctuations underscore the importance of maintaining a well-diversified portfolio.

Schwab's latest forecasts, based on data through October 31, 2025, cover the 2026–2035 period. By grounding decisions in these long-term expectations, investors can more confidently plan for the future.

Our equity expectations are modestly lower this year, primarily because market prices outpaced increases in corporate earnings forecasts. We now expect U.S. large-cap equities to deliver annualized returns of 5.9% over the next decade, down slightly from last year's outlook of 6%.

Fixed income returns are also slightly lower. We expect U.S. aggregate bonds to deliver annual returns of 4.8% over the next decade, compared to 4.9% last year. Cash equivalent investments—such as Treasury bills—have seen a similar adjustment. As the Federal Reserve continues to reduce short-term rates, our 10-year forecast for cash now stands at 3.3%, down from 3.5% a year ago.

On the macroeconomic front, we've modestly lowered our 10-year forecast for real U.S. gross domestic product (GDP) growth to 1.9% from 2.0%, while our long-term U.S. inflation forecast has edged higher to 2.4% from 2.3%. This uptick reflects both near-term pressures—such as tariff uncertainty—and a longer-term trend that remains modestly above the Fed's 2% target.

The Federal Reserve faces an increasingly complex balancing act at a time when traditional anchors of economic stability—stable growth, predictable inflation, and fiscal discipline—have loosened their hold. The central bank must now navigate the tension between the two sides of its dual mandate—stable prices and maximum employment—as inflation remains modestly above the Fed's 2% target and signs of a weakening labor market emerge. Meanwhile, the U.S. yield curve has steepened, which may reflect market concerns about persistent inflation and the government's ability to manage its mounting debt.

Risks remain present in the current environment. Geopolitical tensions, elevated U.S. debt levels, and policy uncertainty all add to the complexity of macroeconomic and asset class return forecasting. On the fiscal front, high federal spending could worsen deficit concerns, while aggressive spending cuts aimed at reducing deficits could slow growth. Escalating U.S.-China trade tensions could also create supply shocks that stoke inflation while dragging on growth. Meanwhile, weakening labor market conditions could signal shifting economic momentum.

Our 10-year forecast incorporates near-term influences—such as sticky inflation and the potential for more modest GDP growth—alongside longer-term structural trends.

Inflation (as measured by the Consumer Price Index, or CPI) has eased since its pandemic-era peak but remains above central bank targets and continues to pose a risk for investors, particularly given mounting government debt and policy uncertainty. Our long-term inflation forecast has edged up to 2.4% from 2.3%, reflecting near-term pressures, such as tariff uncertainty, and a longer-term trend that remains modestly above the Fed's 2% target.

We anticipate a gradually weaker dollar over our forecast horizon. While our forecast has long been at odds with the dollar's persistent tendency to trade above "fair value"—in part due to its role as a global reserve currency—2025 demonstrated how quickly conditions can change. Driven by shifts in trade policy and increased international hedging of U.S. dollar asset exposure, the dollar experienced notable depreciation. At the same time, the price of gold surged as investors and central banks sought alternatives to dollar-based assets.

The dollar's strength since the global financial crisis has historically provided a tailwind to U.S. market performance, but further dollar weakness could shift this dynamic. For U.S. dollar-based investors, a weaker dollar could boost the appeal of international investing without currency hedging, as it may provide a tailwind to returns for non-dollar-based assets.

Higher index prices create a challenging starting point for U.S. equity valuations, though improvements in the earnings growth outlook have helped offset some of that potential drag. Investors perceive AI-led productivity gains as a driver of earnings growth—potentially justifying some of the current premium—but lofty valuations come with equally lofty expectations. If earnings growth fails to deliver, future returns could fall short. On balance, we expect U.S. large-cap equities to deliver annualized returns of 5.9% over the next decade, down slightly from last year's outlook.

Even as the Federal Reserve continues to lower short-term interest rates, our 2026 outlook highlights ongoing opportunities in fixed income. Yields remain attractive, though slightly lower than last year.

Short-term rates closely follow the federal funds rate, making them sensitive to policy changes, while longer-term rates are driven more by growth and inflation expectations. These dynamics shape our U.S. fixed income outlook, which has improved meaningfully compared to the past decade, driven primarily by higher starting yields.

With yields elevated across the curve, we project U.S. government bonds will continue to deliver some of their strongest long-term returns since the financial crisis—a welcome development for investors seeking income and diversification. We expect U.S. aggregate bonds to deliver annual returns of 4.8% over the next decade, down slightly from last year's forecast of 4.9%¹. While this outlook marks an improvement from the past decade, returns are still expected to fall below long-term historical averages. Interest rates are expected to remain elevated relative to recent history, but a return to the 1980s highs that supported even higher total returns is unlikely.

We have also lowered our forecasts for cash equivalent investments due to declining starting rates. As the Fed continues to reduce rates, our 10-year forecast for cash equivalent returns now stands at 3.3%, down from 3.5% a year ago. This outlook reflects rate estimates that, while higher than the extreme lows of the past decade, are below current levels.

After years of underperformance, developed international equities performed well in 2025, outpacing their U.S. counterparts. Looking ahead, we forecast 7% annualized returns over the next decade compared to 5.9% for U.S. large-cap equities. This advantage stems largely from more attractive valuations, even as U.S. equities benefit from stronger earnings growth expectations. International equities also offer higher expected dividend yields and typically come with greater volatility—with the latter being a risk for which investors expect to be compensated.

Beyond the return potential, international equities present a compelling case for diversification. They offer exposure to different economies, sectors, regulatory environments, and consumer demographics—helping to manage risks associated with the highly concentrated U.S. market. For U.S. dollar-based investors, a weakening dollar could provide an additional tailwind to international returns, while foreign currency exposure can enhance diversification during periods of U.S.-driven market volatility.

Even though U.S. markets struggled in the first half of 2025, the S&P 500^® achieved another strong year, with a broad recovery driven largely by sustained enthusiasm around artificial intelligence. This raises the question: How much room is left for further growth?

Several factors complicate the outlook for equities. U.S. valuations remain elevated, and concentration in large-cap indices has reached record highs, with the largest 10 companies in the S&P 500—mostly in technology and growth sectors—representing approximately 40% of the index's market capitalization. This concentration raises questions about whether current prices reflect sustainable earnings growth or an emerging bubble. With less room for error, the current environment presents both significant opportunities and notable risks.