Key Forecast Updates

Relative to Q4 2025, our long-term outlook for fixed income assets has broadly improved across both sovereign and spread exposures:

• U.S. Aggregate Bonds: Revised to 4.7% from 4.6% last quarter.
• U.S. Long Treasury Bonds: Revised to 5.6% from 5.2% last quarter.
• U.S. High Yield Bonds: Revised to 4.8% from 4.3% last quarter.

Our 10-year forecasts for equity markets declined modestly across regions as last quarter’s 3.3% gain in global equities weighed on valuations:

• U.S. Large-Cap Equities: Revised to 5.2% from 5.3% last quarter.
• International Equities ex-U.S.: Revised to 6.7% from 7.1% last quarter.
• Emerging Markets Equities: Revised to 7.5% from 8.1% last quarter.

Given increased relative attractiveness of securitized credit and private credit, especially as corporate spreads continue to tighten, we broadened our capital market forecasts to include some of these asset classes.

Overview

Q4 2025 Developments Informing Our Long-Term Forecasts

The global economy ended the year on a firm footing, despite continued policy uncertainty, primarily emanating from the U.S. Policy uncertainty in Q4 was centered on the U.S. government shutdown, spanning from the beginning of October through mid-November, which temporarily disrupted many government services, including a number of economic releases.

Nevertheless, the available data suggest that economic activity and the labor market, especially when excluding government workers, remained resilient. U.S. real GDP grew over 4% quarter-over-quarter (annualized) in Q3, with the Atlanta GDPNow Q4 estimate exceeding 5% as of mid-January. Reflecting this strength, we slightly increased our 10-year U.S. GDP growth forecast to approximately 2%, which remains close to the average following the Global Financial Crisis.

Strength in the real side of the economy has also kept upward pressure on inflation. U.S. CPI ended December at 2.7% year over year, down from 3% at the end of Q3, but consistent with the average pace for 2025. Our 10-year U.S. inflation forecasts remain roughly unchanged at around 2.5% in this quarter’s Capital Market Assumptions (CMAs).

The Federal Reserve (Fed) continued its rate-cutting cycle in Q4, implementing two additional cuts after resuming the cycle in September, even as inflation remained elevated. However, the December meeting’s Summary of Economic Projections suggests a slower pace of rate cuts in 2026. As of this writing, tensions between the Trump administration and the Fed remain high.

Central bank policies are diverging across global markets. The European Central Bank (ECB) has held the deposit facility rate at 2% since mid-2025. The ECB has been able to lower rates more aggressively than the Fed due to greater progress on inflation, with CPI returning to its 2% year-over-year target in December.

In contrast, rising inflation and yen weakness prompted the Bank of Japan to raise its target rate by 25 bps to 0.75% in December, the second increase of 2025. Newly inaugurated Prime Minister Takaichi is pushing for more aggressive fiscal stimulus, which could provide near-term support for Japanese growth. Meanwhile, as Japanese inflation rises and the yen weakens, China is trending in the opposite direction, with falling inflation and a strengthening yuan.