Northern Trust Capital Market Assumptions Five-Year Outlook: 2021 Edition

Released August 2020

Every year, Northern Trust’s Capital Market Assumptions Working Group develops forward-looking, historically aware forecasts for global economic activity and financial market returns that drive our five-year asset class return expectations and inform our asset allocation decisions.

All of this comes together in the form of our long-term strategic asset allocations, which are used by institutional and individual investors worldwide.


In recent years, global equities had slightly outpaced market forecasts for lower equity returns. Then the COVID-19 pandemic hit the global economy, putting an end to the 10-year bull market. Equity markets have now started to recover, but the pandemic introduced and exacerbated challenges that we expect to subdue financial market returns over the next five years. Here are the six themes shaping our outlook:

  1. RETOOLING GLOBAL GROWTH — Companies will prioritize stability over profitability by re-routing their supply chains, moving production inside their home countries, and building healthier balance sheets. After the stimulus-induced surge, global growth will settle at low levels.
  2. MASSIVE MONETARY TOOLKIT — The controversial Modern Monetary Theory (MMT) — which advocates for greater coordination between monetary and fiscal policy — is, in reality, already being applied. This evolution has given central banks (recently viewed as ineffective) a big new toolkit.
  3. STUCKFLATION TESTED — Inflation faces a test from many of this year’s themes — notably Retooling Global Growth; One World, Two Systems and Massive Monetary Toolkit — but the effects of slow growth, technology and automation will keep inflation at or below central bank targets.
  4. ONE WORLD, TWO SYSTEMS — Last year’s Irreconcilable Differences theme is evolving to where the U.S. and China will learn to live on the same planet with their opposing views on economic policy. Collaboration won’t be absent, but won’t be optimal either — leading to inefficiencies.
  5. REIMAGINING CAPITALISM — For everyone to believe in (some form of) capitalism, rules alleviating the “winner take all” dynamic must evolve. Business leaders, the ultra-wealthy and politicians representing those left behind will find a way to forge a new capitalism that works better for all.
  6. STAY FOCUSED ON CLIMATE RISK — The pandemic took focus off climate-related issues, but the risks have not gone away. In some cases, they have intensified. Post-pandemic economic rebuilding will force leaders to re-engage with climate risk — a headwind for some industries but a tailwind for others.