Lower Returns Ahead for US Stocks? Global Diversification May Be Key Going Forward

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The return forecast for the Global Market Index held steady in June after ticking higher for four straight months. GMI’s long-term forecast is unchanged at an annualized 7.1%, matching the estimate in theEchoing recent history, US equities are the outlier for expected return relative to the various asset classes that comprise GMI. The average forecast for American stocks is well below this market’s trailing 10-year performance.

It’s likely that some, most or possibly all of the forecasts above will be wide of the mark in some degree. GMI’s projections, however, are expected to be somewhat more reliable vs. the estimates for its components. Predictions for the specific markets are subject to greater volatility and tracking error compared with aggregating the forecasts into the GMI estimate, a process that may reduce some of the errors through time.

Here’s a brief summary of how the forecasts are generated and definitions of the other metrics in the table above:The Building Block model uses historical returns as a proxy for estimating the future. The sample period used starts in January 1998 . The procedure is to calculate the risk premium for each asset class, compute the annualized return and then add an expected risk-free rate to generate a total return forecast.

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