Market returns on stocks and bonds over the next decade are expected to fall short of historical averages, according to 2021 estimates of economists at Charles Schwab. The main factors behind the lower expectations for market returns are historically low-interest rates, tepid long-term economic growth prospects, and elevated equity valuations.

Three primary factors are behind the forecast for reduced returns

“Low-interest rates. Lower inflation affects yields on everything from cash to 30-year Treasury bonds. Inflation is low by historical standards and expected to remain so over the next 10 years. When the rate of inflation is low, nominal bond yields also have been low. Low yields mean investors earn less from the fixed-income portion of their portfolios.”

“Low economic growth. At present, while near-term economic growth is likely to be robust, as the economy opens up (post-pandemic), consensus forecasts of economic growth over the long term remain subdued. A measure of economic growth is annual real gross domestic product (GDP) growth. According to consensus forecasts, economists expect 2.3% GDP growth per year, on average, over the next 10 years, even after accounting for expectations of increased economic activity post-pandemic. This compares to historical average GDP growth of 3.1% per year (since 1948).”

“Equity valuations. Valuations appear to be stretched compared to last March’s levels. While earnings growth is expected to remain strong in the medium term – as the economy starts to get back to normal post-pandemic – the stock rally since last March has run far ahead of these expectations. High stock prices today, without a proportionate increase in future earnings, mean lower expected returns going forward. But stocks still tend to have higher expected returns than bonds, as they generally have higher risks.”