Are Investors Expecting Too Much from the Stock Market?

Key Takeaways

• Four years of double-digit returns in the US equity market are a historical anomaly, according to analysts.
• Rich valuations and rising interest rates could put downward pressure on stock returns in the coming years.
• In contrast, the outlook for bond investors is stronger, thanks to rising yields.

Stock investors have had a remarkable few years, but it may be time to tone down expectations.

The US equity market has returned roughly 24%, 22%, and 18% in the three calendar years since the bear market of 2022, according to Morningstar’s CRSP US Stock Database. So far this year, stocks are on track for an 11% return, meaning US equities have returned nearly 19% per year on average for the last four years, including dividends.

While this period of supercharged returns has been great for portfolios, analysts note that it’s not the norm. Stocks have posted a 10% compound annual growth rate over the past century, according to CRSP data.

But now, growing doubts about the artificial intelligence trade, which has been a key driver of the bull market, are weighing heavily on stocks. Valuations have eased in recent months but still look rich. Zooming out, analysts say interest rates and inflation are likely to remain elevated for years, creating headwinds for equities.

Analysts say this all adds up to a reason for investors to temper their outlook, at least concerning the stock market. “Expectations are elevated,” says Emily Roland, co-chief investment strategist at Manulife John Hancock Investments. “Investors haven’t really experienced any meaningful downside volatility that’s lasted in the last few years.”

That downside risk for stocks has a silver lining. In the bond market, the higher interest rates that will likely weigh on stocks could change the calculus for fixed income. Analysts say investors may see higher bond returns than in the past decade.

“The relative valuation of equity and fixed income has changed,” says Stephen Dover, chief market strategist and head of the Franklin Templeton Institute. “As an investor, you’re making a different decision [with stocks]: How much better than fixed income can I do?” With rates climbing, less-risky bonds yielding 5% or more might look more attractive. Stocks will have to perform even better than they did at low rates to compensate investors for their risk.

Why Have Stock Returns Been Unusually High?

Over the past century, the US stock market has returned about 10% per year on an annualized basis. But returns since 2022 (and even since the mid-2000s) have been higher.

“We are amid the greatest four-year bull market in modern history,” says Roland of Manulife John Hancock. She points out that if you invested in the stock market when it bottomed in October 2022, your returns would have compounded annually at a 22% rate, more than double the market’s long-term historical average.

“We’ve been in this unusual period between the great financial crisis and the great covid crisis,” explains Dover of Franklin Templeton. The defining characteristic of this period has been rock-bottom interest rates, which boosted stock returns more than fixed-income returns. More recently, the AI boom has sent stocks soaring.

Andrew Slimmon, head of the applied equity advisors team at Morgan Stanley Investment Management, reminds investors that a compound annual return of roughly 10% a year doesn’t necessarily mean steady 10% returns every year. In a bull market, annual returns can come in well above that, while a correction or bear market can produce negative returns. “The key question is: When is the next correction going to wash away this strong bull market?” he says.

Future Stock Returns Could Be Lower

No one has a crystal ball for the markets, but analysts agree that the last few years of dramatic outperformance are unlikely to repeat. Vanguard forecasts that the US equity market will return 4.8%-6.8% on an annualized basis over the next decade. Those below-average expectations are based on elevated valuations, explains Kevin DiCiurcio, Vanguard’s head of capital markets research.

“Valuations aren’t very useful for predicting what markets will do over the next year or two, but they have historically been more informative about returns over longer horizons,” DiCiurcio told Morningstar via email. “When stock prices are high relative to fundamentals such as profitability, inflation and interest rates, investors are paying more today for the economic fundamentals that ultimately support future cash flows, which tends to reduce the returns they can reasonably expect over time.”

A decline in valuations across the market prompted an increase in Vanguard’s projections last month, which were even lower (4.2%-6.2%) at the end of June. Vanguard’s projections are lower than some, but the firm isn’t alone in forecasting returns well below those of the past three years. As of August, BlackRock was forecasting roughly 9% returns for the US equity market over the next five years. JPMorgan Asset Management expects US large-cap stocks to return about 7.5% over the next 10-15 years.

Dover of Franklin Templeton believes the historical long-term return of 9% or 10% for equities could be achieved over the next decade. That’s based on how the market has delivered a roughly 4% premium over the risk-free interest rate, often benchmarked by the yield on the 10-year Treasury bond, throughout history.

Dover points to three critical factors for stocks: AI’s impact on the economy, the path of interest rates (accounting for inflation), and whether the United States continues to outperform international markets. Other trends are at play, including the growing share of companies that stay private for longer, which could keep some of the biggest growth stories out of public markets.

Bonds Look More Attractive

The same forces weighing on stock returns in the years ahead can also open opportunities in other asset classes, analysts say. “To us, there’s an opportunity not to abandon stocks at these levels, but to temper expectations and maybe up your expectations on fixed income as we head into 2027,” says Roland of Manulife John Hancock.

Vanguard projects returns of 5.1%-6.1% for aggregate US bonds over the next decade. BlackRock expects a roughly 4.9% return on aggregate bonds over the next five years, while JPMorgan Asset Management is looking for a 6.1% return on investment-grade bonds over a longer horizon. That’s a big change from today; the Morningstar Core US Bond Index is down 0.29% so far in 2026.

Stocks Are Still Attractive

But even if returns on US equities look lower in the future, analysts say investors shouldn’t do away with stocks altogether.

“Rates are high, and we think they’re going to go higher,” says Dover of Franklin Templeton. As a result, the value of bonds relative to stocks has increased. “It doesn’t mean we’re not positive on equities,” he says. In the short term, he expects strong earnings to continue driving growth.

Roland of Manulife John Hancock expects the market to return in the low-double digits next year, still above average. Over the long term, she expects returns to revert to their historical average. “I still think stocks are going to be the most powerful compounder of returns over time in portfolios,” she says.

Slimmon of Morgan Stanley says the shorter-term picture could even look rosier: “It’s likely that this bull market could actually last longer,” given ongoing powerful earnings growth. He says he’s not seeing bubble-like signs of euphoria in the market.

The Bottom Line for Investors

While single-digit stock returns might feel abnormal to today’s investors, strategists emphasize that it’s all about perspective. “It’s important to remember what’s normal by recent memory versus what’s normal by longer-term history,” says Steve Sosnick, chief strategist at Interactive Brokers.

“Stocks only care about what is priced into the future, but investors frame their viewpoint about the future based on what’s happened recently,” says Morgan Stanley’s Slimmon. He says investors should continue to invest through pullbacks and add when the market is down to achieve a more attractive long-term return.

For Franklin Templeton’s Dover, the best way to maximize returns on equity is also one of the least exciting: dollar-cost averaging over a long period. “It makes a lot of sense to be in equity and look at it over a long period because it isn’t actually that risky,” he says. “Arguably, it’s risky not to be in equity.”