2024 Long-Term Capital Market Assumptions – Q2 Update

Executive Summary:

• As we highlighted in the previous quarterly edition of Invesco’s Long-term capital market assumptions (CMAs), concentration in US large-capitalization equities is a risk even for moderate, globally diversified investors. We believe diversification could potentially mitigate some of this risk. However, some of the challenges that stem from overvalued concentrated equity markets are pervasive beyond the US.
• Our CMA valuation building block model considers two critical variables when determining a fair valuation for equities: Inflation expectations, and interest rates, which we then compare to current valuations to determine whether they are likely to expand or contract over our forecast period. Both variables have an inverse relationship with valuations, making elevated valuations more difficult to justify in a macroenvironment with higher interest rates and inflation.
• Higher valuations are likely to be challenging for equities over the long term. Relative to fixed income, equities are significantly less attractive than they were just a couple of years ago. Not all is lost for equity investors as there are areas of opportunity highlighted by our CMAs, such as in US small caps and emerging markets.

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