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DWS Long View Q2 - 2025
8/14/2025
How sensitive are forecasts to prices?
Jason Chen
Senior Portfolio Strategist
Dirk Schlüter
Co-Head, DWS House of Data
- Equity forecasts for the next decade are lower from the end of Q1, driven by strong price returns which has driven equity valuations further into strategically demanding levels.
- Despite tight spreads across credit markets, higher real yields in sovereign bond curves continue to make fixed income strategically compelling, both versus the previous decade and relative to equities. US High Yield forecasts continue to compare favorably to US equities
- Outsized moves in equities markets impact the weight of valuations on the long-term outlook, although income contribution can also be meaningfully impacted all else equal. After a market selloff, the strategic outlook for income may improve as earnings recover relative to a temporarily depressed price denominator.
- In aggregate, the return outlook for strategic investors is somewhat underwhelming, reflecting historically demanding valuations for risk assets but robust compensation for inflationary risks on healthy sovereign bond yields.
Summary
In this report, we present the DWS long-term capital market assumptions for major asset classes as of the end of Q2 2025 while exploring the risks to these forecasts.
As we enter the midpoint of 2025, risk markets continue to melt higher despite uncertainty around global trade policy and continued geopolitical tensions in the Middle East and Ukraine. While peak uncertainty around protectionist tariff policy is arguably behind us, projections around the endpoint for country-specific trade tariffs remain largely unknown, which has made it quite difficult for the economist community to accurately model the potential impact and for the investment community to fully grasp the impact on corporate profitability. Nonetheless, global equity markets remain unfazed, making new highs following a brief bout of high volatility in early April.
For the first half of the year, global equities as measured by the MSCI All Country World (“ACWI”) index returned a robust 10.1%, having rallied more than 24% from their April trough. Looking across equity regions, the S&P 500 returned 6.2% but was outpaced by strong international equity returns: international developed markets and emerging markets were up 19.5% and 15.3% in USD, respectively, bolstered by growth optimism but also aided by a significant positive revaluation in the majority of non-dollar currencies. In local currency terms, MSCI Europe, Australasia and Far East.(“EAFE”) and MSCI Emerging Markets (“EM”) were up a more modest 7.8% and 10.8%, respectively, which still outpaced US markets that reached demanding valuation levels.
As global growth has been unexpectedly resilient and inflation has continued above many central bank target levels, global bond yields have not experienced the trajectory of interest rate cuts that had been expected coming into 2025. Real yields remain robust across regions, with the 10-year US Treasury ending June at 4.23% and the 2-year US Treasury yield trading at 3.72%. This strong carry has helped to generate strong income-driven returns across core bonds, with the Bloomberg US Treasury Index returning 3.79% through the first half of the year. The Bloomberg Global Aggregate Bond Index returned 2.81% over the same frame, as European interest rates climbed modestly higher in Q1 on the back of economic optimism around increased fiscal impulse. Within credit markets, spreads remain tight with US High Yield and US Investment Grade corporate bond spreads trading at 2.90% and 0.82%, respectively, both well below long-term averages.
Our models now forecast an annual local currency return of 5.7% for the MSCI All Country World Index (“ACWI”) over the next decade, versus 6.1% three months prior as well as our forecast for the Global Aggregate Bond Index which is unchanged at 3.6%. At an aggregate level, we estimate the forecasted rate of return on a diversified strategic asset allocation at 5.5%*, down from 5.7% at the end of Q1.
*Source: Bloomberg as of 30 June 2025. DWS Calculations for a strategic asset allocation that targets volatility of 10%.