2025 appears to be the year of normalization, or transition between expensive asset classes and more reasonably priced ones. In the chart below, you can see the 7 year real return forecast for Equity, Fixed Income and Cash by GMO. What you can see is that the expected return forecast for large cap US equities is negative under a normal rate scenario and even if rates were to be more accommodative. The number itself is not that relevant, as predictions are always surrounded by uncertainty, but the direction is clear. At current valuations, stocks have typically, and historically, provided low to negative subsequent real returns. Since returns typically are a reflection of corporate results, what this chart seems to indicate is that earnings are expected to suffer, and that may be increasing investors fears on the U.S. economy entering in an economic recession. At this point, tariffs, if enacted as announced, can be the trigger of this valuation cleansing. International stocks numbers look good in absolute and relative basis to the US. Bonds look more muted as they face some headwinds with inflation.
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