In its latest Capital Market Assumptions report, the BlackRock Investment Institute said bonds and equities will likely deliver compressed returns over the next five years, pulled down by stretched valuations and moderate economic growth.

According to the report, the five-year expected return for US large-caps is 4.3 per cent, with US small-caps delivering an expected 4.8 per cent. Emerging markets equities, from a US perspective, will likely deliver 6.5 per cent.

Further, from a European standpoint, global small-caps are set to return 4.6 per cent, with Economic Monetary Union (EMU) large-caps delivering 6.0 per cent. A bright spot remains in global private equity, expected to return 7.5 per cent.

In terms of earnings trends, the report estimates earnings in the US and Japan to be above their long-term average. However, emerging markets and Europe will come in below trend.

The report said equities are set to outperform fixed income in the medium term.

“[The report's] economic base case and the valuation gap between equities and bonds support the case for strong performance from equities relative to fixed income over the next five years," it said.

US cash, the report noted, is expected to return 1.5 per cent over the medium term. Global ex-US treasuries are set to deliver 1.0 per cent, US credit (all maturities) 2.7 per cent, US treasuries (all maturities) 1.5 per cent and US dollar emerging markets debt 4.6 per cent.

EMU corporate bonds will likely deliver 0.5 per cent, EMU cash 0.0 per cent and EMU (all maturities) 0.1 per cent.

BlackRock’s long-term assumptions, however, remain more positive than those for the medium term.

Notably, “10-year-plus capital market assumptions are based on normalised valuations and interest rate levels, and are driven by five risk premia: equity, duration, inflation, credit and illiquidity", the report stated.