Why investors should not count on 20% annual returns for U.S. stocks

After four years of double-digit returns from U.S. stocks, investors should curb their enthusiasm, Morningstar analysts warn. Low interest rates between the financial crisis and the pandemic, followed by the AI boom, fueled the stock market rally. But high valuations and rising borrowing costs could weigh on returns in the coming years.

Following the bear market of 2022, U.S. stocks returned around 24% in 2023, 22% in 2024, and 18% in 2025, according to Morningstar’s CRSP US Stock Database. So far this year, they are up 11%. That means U.S. equities have returned an average of around 19% a year over the last four years, including dividends, Morningstar writes.

While that run has boosted portfolios, analysts caution that it is far from normal. Stocks have delivered a compound annual growth rate of 10% over the last century, according to CRSP data.

“We are amid the greatest four-year bull market in modern history,” says Emily Roland, an 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 has left expectations elevated, she says.

The historical annual return of 10% does not mean steady gains every year, Andrew Slimmon, head of the applied equity advisors team at Morgan Stanley Investment Management, reminds investors. Outsized gains are inevitably followed by declines. “The key question is: When is the next correction going to wash away this strong bull market?” he says.

The drivers of the rally are weakening: doubts about AI investment are weighing on the market, valuations have eased but stocks remain expensive, and inflation and interest rates are likely to stay elevated for years, Morningstar writes.

Analysts interviewed by Morningstar do not expect the rapid gains of recent years to be repeated. Vanguard projects annualized returns of 4.8-6.8% for U.S. stocks over the next decade. BlackRock expects around 9% over the next five years, while JPMorgan Asset Management projects returns of 7.5% for U.S. large caps over the next 10-15 years.

Kevin DiCiurcio, Vanguard’s head of capital markets research, attributes those modest forecasts to elevated valuations: when stock prices are high relative to earnings, investors pay more for future cash flows, which reduces the returns they can expect over the long term.

Stephen Dover of Franklin Templeton believes historical returns of 9-10% are still achievable. Three factors will determine the outcome: AI’s impact on the economy, the path of interest rates, and whether U.S. stocks continue to outperform global markets.

High interest rates are shifting the balance in favor of fixed income: less-risky bonds yielding 5% or more look increasingly attractive, prompting investors to reassess their portfolios, Morningstar notes.

Vanguard projects returns of 5.1-6.1% for the broad U.S. bond market over the next decade. BlackRock sees 4.9% over the next five years, while JPMorgan Asset Management projects 6.1% for investment-grade bonds. That is a significant shift, given that the Morningstar Core US Bond Index, a benchmark tracking the broad market for high-quality U.S. investment-grade bonds, has fallen 0.3% year to date.

“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 Emily Roland. Strong corporate earnings should continue to support the market, and there are no signs of a “bubble” yet, writes Morningstar.

Slimmon of Morgan Stanley Investment Management advises investors to keep investing through pullbacks and add to their positions when the market is down.

Stephen Dover, meanwhile, believes the best strategy is to invest the same amount regularly over a long period, regardless of prices. “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 concludes. “Arguably, it’s risky not to be in equity.”