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2026 Capital Market Assumptions

Our long-term outlook utilizes a building block approach to estimate asset class returns, risk, and correlations relative to history to aid in allocation decisions.

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Geopolitical and AI-based risks weigh on sentiment; we see equity valuations pressured favoring fixed income.

Global financial markets have experienced a broad decline driven by rising geopolitical tensions involving Iran. These tensions have pushed energy prices higher, influencing inflation expectations and potentially altering the anticipated path for interest rates, all of which would weigh on the consumer outlook.

Before events in the Middle East, markets were focused on the AI narrative, uncertain about the diffusion of AI across industries and the scale of investment required. Against this backdrop, our CMAs (Capital Market Assumptions) see equity valuations as elevated and expect them to moderate. Risk favors fixed income over equities as the return differential is relatively low compared to history.

We have revised our methodology for calculating CMA equity returns. The revised framework adds buybacks across regions and earnings growth is modified to include profit margins. Valuations now use the CAPE ratio and inflation data is sourced from the IMF. Finally, earnings are calculated using GDP-weighted geographic revenue measures.

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Relative tactical asset allocation positioning (March 2026) and CMA scoring (Q1 2026).

The CMA scoring diverges from our tactical positioning, with the CMA scoring pointing to a preference for fixed income over equities and below-average portfolio risk, while the tactical allocation recommends a maximum overweight exposure to equities and above-average portfolio risk. From a CMA perspective the excess return from equities over fixed income is somewhat low compared to their historical average over the forecasted horizon. The tactical positioning sees opportunities in the nearer term with the global economy exhibiting notable strength with positive momentum across regions and sectors.

To assist investors in identifying the relative attractiveness between our near-term tactical asset allocation (TAA) and our longer-term capital market assumptions (CMAs), we compare the two distinct time horizons for common asset class pairs.

TAA positioning
CMA scoring
Max
O/W — U/W
Neutral
Max
O/W — U/W
Fixed income
Equities
US equities
DM ex-US equities
DM equities
EM equities
Large-cap equities
Small-cap equities
Government
Credit
Quality credit
Risky credit
Short duration
Long duration
Portfolio risk below average
Portfolio risk above average

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Source: Invesco December 31, 2025. DM= developed markets. EM = emerging markets. For illustrative purposes only. Portfolios mentioned are hypothetical models. Benchmark is a global, moderate risk portfolio consisting of 60% global equities (MSCI ACWI) and 40% global bonds (BBG global agg).

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2026 Investment Outlook: Resilience and rebalancing

We believe the market can continue to rise in the new year, and we expect new opportunities to be unlocked as market leadership evolves.
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Sort through the noise

Fixed Income
Activate flexible fixed income allocations

Fixed income markets offer strong income opportunities at attractive valuations for the first time since the global financial crisis. Explore the capabilities designed to capture market potential.
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Equities
Invesco Equity Approach

An active approach derived from bottom-up analysis with a tight focus on valuation and a contrarian mindset.
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Invesco Private Credit

Alternatives
Yield isn’t found. It’s built.

Uncovering the potential of Private Credit starts with gaining access to them. It’s a world of opportunity – and we have the expertise and the network you need to unlock it.
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Methodology

Capital market assumptions (CMAs) form the foundation of our strategic and tactical asset allocation decisions. With an eye on 170 asset classes across private and public markets in 20 different currencies, we maintain a comprehensive view of trends, risks and correlations. Complete methodology information is listed here.1

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  • Expansive insight: allows us to offer unique perspectives
  • More narrow observations: that other forecasts may miss
  • Help investors identify: underlying drivers of return

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  • Asset class proxies:

    US HY muni represented by the BBG muni bond HY index.
    US muni represented by the BOA ML US muni index.
    US broadly synd loans represented by the CSFB leverage loan index.
    China RMB credit represented by the BBG China corporate index.
    US HY corps represented by the BBG US HY index.
    US IG corp represented by the BBG US IG index.
    US TIPS represented by the BBG US TIPS index.
    EM agg represented by the BBG EM agg index.
    US agg represented by the BBG US agg index.
    US tsy represented by the BBG US tsy index.
    US MBS represented by the BBG US MBS index.
    Global agg represented by the BBG global agg index.
    Global agg ex-US represented by the BBG global agg ex-US index.
    US large cap represented by the S&P 500 index.
    US mid cap represented by the S&P Midcap 400 index.
    Japan equity represented by the MSCI JP index.
    Global equity represented by the MSCI ACWI index.
    US small cap represented by the S&P Small Cap 600 index.
    Canada equity represented by the S&P TSX index.
    EAFE equity represented by the MSCI EAFE index.
    Europe equity represented by the MSCI Europe index.
    UK large cap represented by the MSCI UK Large Cap index.
    China large cap represented by the MSCI China index.
    APAC ex-JP represented by the MSCI APXJ index.
    EM equity represented by the MSCI EM index.
    US REITs represented by the FTSE NAREIT equity index.
    HFRI hedge funds represented by the HFRI HF index.
    Global REITs represented by the FTSE EPRA/NAREIT developed index.
    GS commodities represented by the S&P GSCI index.

    Investment risk:

    The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations), and investors may not get back the full amount invested.

    Invesco Solutions develops CMAs that provide long-term estimates for the behavior of major asset classes globally. The team is dedicated to designing outcome-oriented, multi-asset portfolios that meet the specific goals of investors. The assumptions, which are based on 10-year investment time horizons, are intended to guide these strategic asset class allocations. For each selected asset class, we develop assumptions for estimated return, estimated standard deviation of return (volatility), and estimated correlation with other asset classes. This information is not intended as a recommendation to invest in a specific asset class or strategy, or as a promise of future performance. Estimated returns are subject to uncertainty and error and can be conditional on economic scenarios. In the event a particular scenario comes to pass, actual returns could be significantly higher or lower than these estimates.

    Unless otherwise stated, all information is sourced from Invesco, in USD and as of December 31, 2025. The opinions expressed are those of the Invesco Solutions team and may differ from the opinions of other Invesco investment professionals. Opinions are based upon current market conditions and are subject to change without notice. Past performance is not a guarantee of future results. Diversification and asset allocation does not guarantee a profit or eliminate the risk of loss.

  • 1

    Capital Market Assumptions methodology

    We employ a fundamentally based “building block” approach to estimating asset class returns. Estimates for income and capital gain components of returns for each asset class are informed by fundamental and historical data. Components are then combined to establish estimated returns. Here, we provide a summary of key elements of the methodology used to produce our long-term (10-year) estimates. 

    Fixed income returns are composed of:

    • Average yield: The average of the starting (initial) yield and the expected yield for bonds.
    • Valuation change (yield curve): Estimated changes in valuation given changes in the Treasury yield curve.
    • Roll return: Reflects the impact on the price of bonds that are held over time. Given a positively sloped yield curve, a bond’s price will be positively impacted as interest payments remain fixed, but time to maturity decreases.
    • Credit adjustment: Estimated potential impact on returns from credit rating downgrades and defaults.

    Equity returns are composed of:

    • Shareholder yield: incorporates dividend yield, the dividend per share divided by price per share and buyback yield, the percentage change in shares outstanding resulting from companies buying back or issuing shares.
    • Valuation change: The expected change in value given the current CAPE (cyclically adjusted price-to-earnings) ratio and the assumption of reversion to the long-term average CAPE ratio, adjusted by current and expected real interest rates.
    • Long-term (LT) earnings growth: The estimated rate of the growth of nominal earnings with considerations to geographic exposure of revenues, margins, and inflation expectations.

    Alternative returns are composed of:

    • REIT expected return is comprised from: expected income stream provided by dividends; and a capital components generated from a growth in earnings from the real estate and valuation changes in the asset.
    • Hedge funds cover a range of strategies; the common expected return drivers are market factors and manager skill in generating excess returns above their benchmark
    • Commodities have an expected income stream from their collateral component as roll yield (moving from one futures contract on the commodity to the next, through time) and spot return (changes in the commodities price)

    Currency adjustments are based on the theory of interest rate parity (IRP), which suggests a strong relationship between interest rates and the spot and forward exchange rates between two given currencies. Interest rate parity theory assumes that no arbitrage opportunities exist in foreign exchange markets. It is based on the notion that, over the long term, investors will be indifferent between varying rates of returns on deposits in different currencies because any excess return on deposits will be offset by changes in the relative value of currencies.

    For volatility estimates for the different asset classes, we use rolling historical quarterly returns of various market benchmarks. Given that benchmarks have differing histories within and across asset classes, we normalize the volatility estimates of shorter-lived benchmarks to ensure that all series are measured over similar time periods.

    Correlation estimates are calculated using trailing 20 years of monthly returns. Given that recent asset class correlations could have a more meaningful effect on future observations, we place greater weight on more recent observations by applying a 10-year half-life to the time series in our calculation.

    Arithmetic versus geometric returns. Our building block methodology produces estimates of geometric (compound) asset class returns. However, standard mean-variance portfolio optimization requires return inputs to be provided in arithmetic rather than in geometric terms. This is because the arithmetic mean of a weighted sum (e.g., a portfolio) is the weighted sum of the arithmetic means (of portfolio constituents). This does not hold for geometric returns. Accordingly, we translate geometric estimates into arithmetic terms. We provide both arithmetic returns and geometric returns, given that the former informs the optimization process regarding expected outcomes, while the latter informs the investor about the rate at which asset classes might be expected to grow wealth over the long run.
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