Your choice regarding cookies: We use cookies when you use this Website. These may be 'session' cookies, meaning they delete themselves when you leave the Website, or 'persistent' cookies which do not delete themselves and help us recognize you when you return so we can provide a tailored service. However, you can block our usage by adjusting your browser settings to refuse cookies.
SUMMARY
- US long-term stock return assumptions similar to last year; International cheaper but headwinds to persist, in our view.
- Silver lining: We believe US small-cap appears to be an attractive diversifier for long-term investors.
- Fixed income returns down slightly from last year, but still offer attractive long-term risk-adjusted return potential and diversification, in our view.
Riverfront is proud to release our 2025 Long-Term Capital Market Assumptions (‘CMAs’). At Riverfront, we believe in ‘Process over Prediction.’ This is the idea that a dynamic investment process built to adapt to unexpected events is more important to long-term investment success than being bound by any particular forecast. Nonetheless, we view long-term (5-7 year forward) asset class forecasts as useful in helping to identify and monitor what we think are important long-range market drivers. In this summary we deliver an update to our capital market assumptions (see summary table on page 2) from last December, with an emphasis on what has changed in the macroeconomy and in our forecasts since our last update.
Return Forecasts Remain Below Average for US Stocks and Credit; Small-Caps Attractive

Our Base Case forecast for US Large-Cap Stocks of approximately 7% (see chart, above and table, below) is similar to last December's forecast. This is due to our increased earnings forecast of roughly +8% annually over the next 5-to-7 years, about one percentage point higher than last year’s forecast. This past year has underlined to us that ‘American Economic Exceptionalism’ allows US corporate earnings to remain resilient despite significant interest rate hikes and inflation…a trend we expect to continue throughout the next business cycle. In addition, we now believe there is a good possibility of corporate tax reform going forward, which could also be another driver of solid earnings. However, this more optimistic view of earnings is offset over our forecast horizon by more elevated starting valuations in most equity asset classes today, relative to a year ago. Our expected terminal multiple for US Large-Caps of roughly 18x twelve-month forward earnings suggests significant contraction in valuation multiples over the forecast horizon.

Our long-term forecast for US aggregate bonds is down slightly from last year, but meaningfully higher than in 2022–23. This is a function of higher starting yields, which should equate to higher total returns if held to maturity.
We believe bonds now offer longer-term focused investors attractive risk-adjusted return potential and diversification at current levels, though they may remain volatile in the near term due to fiscal and Fed uncertainty.
International and Emerging Market stock forecasts are lower versus last year. These markets continue to suffer from economic and geopolitical issues, exacerbated by renewed US political will to reshape terms of global trade.

Stock Forecast in Line with Higher Historical Valuation Periods; Small-Caps the Standout
Our Base Case for US Large-Cap Stocks of +7.1% annualized return over the next business cycle seems low, but is commensurate with average 7-year forward historical returns when the S&P 500 was in the most expensive quintile (top 20%) of starting valuations, as they are now.
Our Base Case for US Small-Cap Stocks of +9.1% annualized return over the next business cycle (see yellow bar, right) also seems low compared to the average 7-year return from 1925-present of over 12% (blue bar). However, US small-caps have higher Base Case expected returns than US Large, Developed International or Emerging Markets. Thus, we increasingly view US small- caps as an attractive allocation option relative to international stocks for longer-term focused, more risk tolerant equity investors.

Key Inputs: Inflation Likely to be Structurally Higher
Our view on structural inflation is one key input to our long-term forecasts. While we believe that the ultra-high inflation levels of 2020–2022 were related to pandemic imbalances and will continue to moderate, we also believe core inflation will average above 2% over the next 5-7 years, across all three of our scenarios. This is related to a host of factors, including the advent of ‘onshoring’ and ‘friendshoring’ (shifting supply chains to domestic or to geographies aligned with the US), as well as reasonable economic growth and more insular trade policies. We believe the low inflation experienced from 2008 to 2020 (blue trend line on chart, right) were an anomaly, driven by China’s entrance into world trade. Inflation has trended at or above 2% per annum for most of the US’s history, other than directly after WWII and two deflationary periods in the late 1800s and early 20th century (red lines).

Key Inputs: Earnings Growth Remains on Trend
Yet another key input to our long-term forecasts is our view on how corporate earnings trend over our forecast horizon. Our Base Case for US Large-cap stocks assume around 8% earnings growth per year across the forecast period. This is roughly in line with the logarithmic trend of +7.6% over the time period from 1985-to present (see red line in chart). We increased this by one percent from our ’24 forecast, as the last year has given us higher conviction in the earnings power evident in American ‘Economic Exceptionalism’. Our Bull Case assumes stronger earnings of around +10% per year, commensurate with a stronger economic backdrop and lower interest rates. Our Bear Case assumes trend earnings of 5% per year, as the below-trend economic growth, higher inflation and interest rates, and higher US dollar assumed in that scenario would sap earnings power.
Key Inputs: Terminal 10-Year Rate Around 4.5%
Another key input to our long-term forecasts is our view on the ‘terminal’ interest rates on US government bonds (where rates will be at the end of the forecast period). In our Base Case, by the end of the 5–7-year forecast horizon, we now expect the US 10-year treasury to yield around 4.5%. This assumption is 50 basis points lower than our 2024 forecast. We have been encouraged by the moderation in inflation over the last 12 months, increasing our conviction that much of the 2020–22 inflation was due to pandemic-specific factors. This forecast also suggests to us that the worst of the downside in bond prices witnessed in 2021–23 is behind us, and that long-term balanced investors will be rewarded by owning bonds again.
Risk Discussion: All investments in securities, including the strategies discussed above, include a risk of loss of principal (invested amount) and any profits that have not been realized. Markets fluctuate substantially over time, and have experienced increased volatility in recent years due to global and domestic economic events. Performance of any investment is not guaranteed. In a rising interest rate environment, the value of fixed-income securities generally declines. Diversification does not guarantee a profit or protect against a loss. Investments in international and emerging markets securities include exposure to risks such as currency fluctuations, foreign taxes and regulations, and the potential for illiquid markets and political instability. Please see the end of this publication for more disclosures.