Northern Trust Capital Market Assumptions 10 Year Outlook: 2024 Edition

ASSET CLASS FORECASTS

What to expect in 2023 for equities, fixed income, interest rates and real assets – and what that means for our positioning.

Equities

Rising interest rates in 2022 disproportionately hurt U.S. equities, with a heavier weight to interest-rate-sensitive growth stocks.

In 2023, we expect:

A downside risk to corporate profits, consistent with an economic slowdown or recession.

Potential improvement in investor sentiment as central-bank rates may plateau, inflation could moderate and a possible recession may pass quickly.

Developed markets to perform better than emerging markets again as China likely will continue to struggle.

Fixed Income

Elevated inflation and interest rate volatility triggered bond losses in 2022, as the Federal Reserve engaged in the fastest set of rate hikes on record.

In 2023, we expect:

Stable fundamentals, low default rates and historically high credit quality to support high yield bond returns.

Investment grade bonds to benefit from a resilient consumer and some moderation of high interest rate volatility.

Investors to find more opportunities in the bond market, with higher income and continued corporate resiliency.

INTEREST RATES

The rising trend of short-term rates that began to crystallize near the end of 2021 gained steam early in 2022 as the Ukraine war reignited inflation pressure.

In 2023, we expect:

Fed rate hikes to total 0.50% to 0.75%, to reach a steady policy rate of 5% that likely would be considered sufficiently high for the Fed to pause.

Non-U.S. interest rates to hold steady or even decline, as non-U.S. regions face less inflation risk and higher recession risk.

Treasury yields to likely move slightly higher but remain stable thereafter as labor market strength supports the economy and makes the Fed hesitant to reverse course.

Real Assets

Natural resources and listed infrastructure brought some stability to the diversified portfolio in 2022, a year where investors struggled to find diversifying asset classes.

In 2023, we expect:

Persistent cash flows, tight commodity markets, stronger balance sheets and attractive valuations to support natural resources.

Natural resources to play an important role in the portfolio, both as a hedge against inflation and a quicker way to potentially benefit from a surge in emerging markets if China re-opens successfully.

Global real estate to post solid gains — after a difficult 2022 — if interest rates stabilize or fall for a sustained period of time.

More Asset Class Insights

Get more of our asset class views.

Point of View

2021 outlook and forecasts across the investment portfolio.

OUTLOOK

2021 Outlook: A V-Shaped Recovery

FEW PLACES TO HIDE

It was a difficult year for stocks, and in an atypical fashion bonds failed to provide much protection.

Source: Northern Trust Asset Management, Bloomberg. Year-to-date data through November 30, 2022. Five-year annualized data from November 30, 2017 to November 30, 2022. Past performance is no guarantee of future results. EM debt means emerging market debt and TIPS means Treasury Inflation-protected securities. Index performance returns do not reflect any management fees, transaction costs or expenses. It is not possible to invest directly in any index. Indexes used are: cash - Bloomberg (BBG) U.S. Treasury Bills 1-3 Months; municipal bonds - BBG Municipal Bond; investment grade bonds - BBG U.S. Aggregate; TIPS - BBG U.S. Treasury Inflation Notes; high yield bonds - BBG U.S. High Yield 2% Issuer Cap; emerging market debt - J.P. Morgan GBI-EM Global Diversified Composite; U.S. equities - MSCI U.S. IMI; developed ex-U.S. equities - MSCI World Excluding U.S. IMI; emerging market equities - MSCI Emerging Markets IMI; natural resources - S&P Global Natural Resources; global real estate - MSCI ACWI IMI Core RE; global listed infrastructure - S&P Global Infrastructure.

2023 ASSET CLASS OUTLOOK

Our asset class assumptions form the basis for our asset allocation framework, which combines long-term, strategic discipline with short-term, tactical flexibility.

ASSET CLASS

Developed Markets
Equal-weight

40%

Risks surrounding fundamentals are tilted to the downside given the extent of cumulative central bank tightening. Pockets of economic durability should limit a U.S. earnings slowdown, while monetary policy offers a bit more support elsewhere. Keeping us equal-weight is the potential for sentiment upside. From beaten down levels, sentiment has runway to improve — particularly in Europe where the valuation discount is steep.

Emerging Markets
4% underweight

While China’s reopening incrementally improves the outlook for emerging market (EM) equities, the reopening process is likely to be bumpy. And China’s ongoing property issues and geopolitical risks remain reasons for pause. We prefer to play the China reopening through non-EM assets, and have a bias for developed market equities where there is greater clarity.

Global Real Estate/Infrastructure
Equal-weight

We are equal-weight both global real estate and listed infrastructure. Global real estate valuations make for a compelling long-term investment opportunity, but interest rate volatility keeps us at a strategic weighting for now. While we like listed infrastructure as a risk asset that can also provide downside protection, we see better risk-reward elsewhere.

Natural Resources
2% overweight

We see upside to commodities given underinvestment creating supply/demand imbalances, as well as increased demand from a China reopening and ongoing Russia disruption. Natural resources (NR) companies show much improved fundamentals to help better weather economic headwinds, while cheap valuations already reflect at least a portion of these economic drags. NR is a key hedge against inflation, geopolitical and China reopening risks.

High Yield
6% overweight

11%

High yield remains our biggest tactical overweight. We expect default rates to rise off of record lows but remain below the long-term average given: 1) strong credit fundamentals that support issuers’ ability to pay; and 2) a benign maturity schedule. Combined with an improved high yield market quality and income yield of ~8%, we find high yield attractive.

Investment Grade
6% underweight

Investment grade fixed income is our largest underweight. Barring a significant economic downturn, the magnitude of any longer term rate decline should be limited and potentially more constructive for risk asset returns. We prefer credit over term (interest rate) risk, especially as rate volatility remains high.

Inflation-Linked
Equal-weight

We are equal-weight inflation-linked bonds on the basis that central banks have the tools and perceived willingness to contain inflation, but that this is mostly reflected in valuations and the path back toward target levels may prove difficult.

Cash
2% overweight

The opportunity cost of holding cash has narrowed with short-term interest rates around 4%. Having some cash on hand is warranted for yield and dry powder for opportunities that arise.

Tactical Risk Position:

Neutral risk positioning

We are underweight equities with a bias for developed markets, overweight high yield at the expense of investment grade, and in favor of NR (portfolio hedge) and cash (tactical optionality). We are neutral risk as we await more clarity on inflation, the central bank reaction function and economic growth risks, hopeful that in aggregate they will allow for better sentiment than in 2022.

*TAA = Tactical Asset Allocation.
**SAA = Strategic Asset Allocation.

6 Key Themes

Our Capital Market Assumptions five-year market outlook provides insight into the forces shaping the investing landscape for the coming years. Here are the six key themes driving our strategic outlook and asset allocation for the next five years.

GROWTH RESTRAINTS

Costly investments for regionalization and climate change may handcuff economic growth — and investment returns — already restrained by high government debt and aging populations.

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INFLATION ADAPTATION

While we expect global economic growth to backtrack, inflation should persist. Tight labor markets, regionalization and higher commodity prices will likely more than offset technology’s disinflationary promise. Investors, consumers and policymakers must adapt.

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CENTRAL BANK CONCESSIONS

New, more permanent inflationary forces complicate central banks’ abilities to reach their objectives. Over time, we think central banks will ultimately concede inflation modestly higher than their target rather than create undue economic harm.

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GEOPOLITICAL FAULT LINES

The deepening U.S.-China strategic rivalry has elevated global political risks, enough to alter fundamentals for investors. Even historically stable political dynamics could shift abruptly and impact equity valuations.

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A SUSTAINABLE GREEN TRANSITION

Countries want to cut emissions and improve energy security, so the green energy transition is still a go. But it requires vast amounts of financing and natural resources. Investors must navigate environmental and economic priorities.

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PRIVATE MATTERS

Private markets continue to grow, backed by improving liquidity supported by strengthening market infrastructure. Private investments are primed to play an increasingly important role in the economy and investors’ portfolios.

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Costly investments for regionalization and climate change may handcuff economic growth — and investment returns — already restrained by high government debt and aging populations.

NEW WORLD RESTRAINTS

We expect several restraints to lead to below-trend real economic growth levels.

Source: Northern Trust Asset Management, Bloomberg. Data from March 31, 2013 to March 31, 2023. Historical trends are not predictive of future results.

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FROM RECALIBRATION TO ADAPTATION

We expect the world will need to adapt to inflation that settles slightly above central bank targets.

Source: Northern Trust Asset Management, Bloomberg. Data from March 31, 2013 to March 31, 2023. All regions use headline Consumer Price Index as the inflation metric. Historical trends are not predictive of future results.

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HIGHER BUT NOT SO HIGH

Restrained growth will limit the degree to which inflation keeps policy rates above past-decade levels.

Source: Northern Trust Asset Management, Bloomberg. Data as of June 30, 2023. Historical trends are not predictive of future results.

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NO END IN SIGHT FOR DE-GLOBALIZATION

The U.S.-China strategic rivalry is at the center of the slow decline in globalization.

Source: Northern Trust Asset Management, Barclays Research, World Bank, Òscar Jordà, Moritz Schularick, and Alan M. Taylor. 2017. “Macrofinancial History and the New Business Cycle Facts.” in NBER Macroeconomics Annual 2016, volume 31, edited by Martin Eichenbaum and Jonathan A. Parker. Chicago: University of Chicago Press. Trade openness is an average of the sum of imports and exports as a percent of gross domestic product for 17 developed countries. Three-year moving average from 1870 through 2021 (latest available). Historical trends are not predictive of future results.

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RESOLVING (UN)SUSTAINABLE CHALLENGES

Lower renewable prices are encouraging, but economic and physical constraints pose a challenge.

Source: Northern Trust Asset Management, IRENA, Financial Times, IEA. Levelized cost of electricity is the lifetime cost of the energy source divided by its energy production (global weighted average used). KWH = kilowatt-hour. Light-shaded bands for each energy source represent the 5th and 95th percentile of the data, except for the fossil fuels band which represents the full range. Data for materials chart is as of December 31, 2020.

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A THRIVING PRIVATE ECOSYSTEM

Over the past decade, direct lending and private market liquidity have both increased substantially.

Source: Northern Trust Asset Management, Apollo Global Management, Preqin, McKinsey Global Private Markets Review 2021, Jefferies 2022 Secondary Market Update. Left chart: from Apollo using Preqin data as of March 2022. Right chart: transaction volume from 2002 through 2022. All data is the most recent available.

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Capital Market Expertise

Every year, Northern Trust’s Capital Market Assumptions Working Group develops forward-looking, historically aware forecasts for global economic activity and financial market returns — which drive our asset class return expectations and inform our asset allocation decisions.

All of this comes together in the form of our long-term strategic asset class allocation suggestions, which are used by institutional and individual investors worldwide.

View our 10-year outlook

Equity

Quantitative Strategies

Fixed Income

Alternatives

Solutions

Sustainable Investing

Retirement

Outsourced CIO

Multi-Asset

Global Tactical Asset Allocation

Diversified Strategist Portfolios

Equity

Quantitative Strategies

Fixed Income

Alternatives

Hedge Funds

Private Equity

Private Credit

Real Assets

Infrastructure

Real Estate

Solutions

Liquidity

Sustainable Investing

Retirement

Outsourced CIO

Multi-Asset

Global Tactical Asset Allocation

Diversified Strategist Portfolios

Equity

Quantitative Strategies

Fixed Income

Alternatives

Hedge Funds

Private Equity

Private Credit

Real Assets

Infrastructure

Real Estate

Solutions

Liquidity

Sustainable Investing

Retirement

Outsourced CIO

Multi-Asset

Global Tactical Asset Allocation

Diversified Strategist Portfolios

Download Our 2023 Outlook

Find out what investors should expect in the years ahead.

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Northern Trust Asset Management

Northern Trust Asset Management is a global investment manager that helps investors navigate changing market environments in efforts to realize their long-term objectives.

Entrusted with $1.1 trillion of investor assets as of June 30, 2023, we understand that investing ultimately serves a greater purpose and believe investors should be compensated for the risks they take — in all market environments and any investment strategy.

That’s why we combine robust capital markets research, expert portfolio construction and comprehensive risk management to craft innovative and efficient solutions that deliver targeted investment outcomes.

As engaged contributors to our communities, we consider it a great privilege to serve our investors and our communities with integrity, respect, and transparency.

2023 Market Outlook

A Pivotal Year

2021 outlook and forecasts across the investment portfolio.

2021 Outlook: A V-Shaped Recovery

Building Smart Portfolios