A Strategic Perspective on Risk and Return Expectations
Yield Signals and Market Repricing
A recent Bloomberg article referenced research by Bank of America noting that bond yields rose in 12 of the past 14 equity bubbles. This observation aligns with history: rising rates often signal financial tightening and have historically preceded equity market volatility. Higher yields increase the cost of capital and reduce the present value of future earnings—both key inputs in asset valuations.
Given elevated Treasury yields, slowing earnings growth, and market concentration in a narrow group of highly valued stocks, the risk of equity revaluation appears meaningful.
Vanguard's Latest Market Forecasts
Vanguard’s most recent 10-year annualized return forecasts (as of April 30, 2025) reinforce this cautious view:
· U.S. equities: 4.3%–6.3%
· Developed international equities: 6.6%–8.6%
· Emerging markets equities: 3.7%–5.7%
· U.S. Treasuries: 3.6%–4.6%
· U.S. aggregate bonds: 3.9%–4.9%
Source: Vanguard Market and Economic Outlook (as April 2025),Vanguard Outlook May 2025
Behavioral Consideration: Prospect Theory & Loss Aversion
As we consider investment strategy for the next decade, it’s useful to reflect on investor behavior. Prospect theory tells us that individuals tend to experience the pain of losses more acutely than the satisfaction of gains—a bias known as loss aversion.
So it’s worth asking:
· What concerns you more?
· A temporary but significant drawdown in equity markets?
· Or the fear of missing out on future market gains, even if they occur from already elevated levels?
Our Positioning Philosophy
Rather than speculate on market timing or trends, we are focusing on:
· Maintaining flexibility through shorter-duration fixed income
· Incorporating income-generating assets that align with inflation expectations
· Reducing concentration in valuation-sensitive sectors
· Preserving liquidity to adapt to volatility or opportunity
This approach aims to balance preservation of capital with long-term growth potential—especially in a period where forward returns may be modest and volatility more frequent.
If you'd like to discuss how your current portfolio reflects these considerations, or if it’s time for a strategic rebalance, please don’t hesitate to reach out. We welcome the opportunity to help align your investments with both your goals and your comfort with risk.
Required Disclosures
This communication is for informational purposes only and should not be construed as personalized investment advice or a recommendation to buy or sell any security. Investment decisions should be based on an individual’s specific financial circumstances, goals, and risk tolerance. Past performance is not indicative of future results. Forward-looking projections and third-party forecasts, such as those from Vanguard, are based on assumptions and are subject to change.
Crosswalk Investment Advisory, Inc. is a Registered Investment Adviser. Registration does not imply a certain level of skill or training.
AI Assistance Disclosure
Portions of this communication were drafted with the assistance of ChatGPT, an AI language model developed by OpenAI, and reviewed for accuracy and regulatory compliance by Crosswalk Investment Advisory, Inc.