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July 2022

Market Update: Higher for Longer – Thoughts on Long-Term Equity Returns

Key Points

• Long-term structural shift is likely underway

• Expect more volatility in the economy, inflation and corporate profits

• Expect lower returns and higher volatility in financial markets

• Our long term equity capital market assumptions are below historical averages

Our strategic thinking has shifted to what we are describing as “higher for longer,” meaning an environment where higher for longer geopolitical uncertainty, inflation and interest rates will lead to higher for longer volatility in the economy and financial markets.

These dynamics, best illustrated by changes in our speedometers, have led us to reduce our near-term forecasts for GDP growth and corporate profits, while increasing our forecasts for inflation and interest rates.

Additionally, this shift is impacting our longer-term outlook for the economy, inflation and equity returns. What do we mean by this? The following charts show a decade-by-decade look at real GDP activity, inflation and stock prices. The bar is the average annual change for each item in each decade, and the line is the volatility, or standard deviation, of those changes.

Looking at real GDP, the US economy after World War II was very strong, averaging 4.2-4.4% growth over the 1950s and 1960s, with relatively low and declining volatility. In the 1970-1990 period, annualized growth slowed to around 3%. During the 1990s, with globalization and the addition of China to the World Trade Organization, the outsourcing of many jobs led to a slowing of real GDP growth rates to 1.9-2.3%

annualized, and volatility on a year-to-year basis fell even lower. While we’re only two years into the decade of the 2020s, GDP growth has slowed further but volatility has moved significantly higher (chart 1).


Regarding inflation, a similar pattern was evident in the 1950-1960 timeframe. Inflation was low – around 2% – and volatility year in and year out also was low. The 1970s brought a shift to higher inflation as two oil supply shocks, along with rising wages, led to a surge in average yearly CPI increases and rising volatility. By the end of the 1970s, a tighter monetary policy regime came into effect and inflation pressures started to abate in the 1980s, though volatility initially increased. With the combination of continued policy successes and globalization, inflation then declined for three decades – from 3% to 1.8% – and volatility was very low. While we’re only two years into the 2020s, inflation is once again up meaningfully and volatility also is on the rise (chart 2).


As it relates to stock prices, the average annual total return for the S&P 500 since 1950 has been around 11%. You can see that some decades are above this level, and some are in line or below this level. Volatility also has varied meaningfully from year to year. Our conclusion is that since the 1990s, we’ve been spoiled. Aside from the post 9-11 period and Great Financial Crisis, economic activity and inflation have been low. And while the first two years of this decade may not be a perfect harbinger of the next eight, we believe we are shifting to a period of higher for longer. How much higher and how much longer isn’t clear, but we believe investors should continue to expect lower returns with higher volatility for equities and should plan appropriately. Our long-term capital market assumptions for equities assumes returns of 6-7% that are meaningfully below the 11% average since the 1950s (chart 3).

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