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Investment Rating - The report does not explicitly provide an overall investment rating for the 60/40 portfolio or specific asset classes, but it suggests a more balanced approach given the current elevated valuations and uncertain structural cycle [8][11] Core Views - 60/40 portfolios have mostly recovered from the 2022 drawdown, but valuations are again elevated, especially for US equities [1][8] - Valuations alone may send too bearish a signal, as macro conditions can support elevated valuations over long horizons [2][9] - The structural cycle (growth, inflation, and policy trends) will be a key driver of 60/40 returns and equity risk premia in the coming years [2][9] - Strategic tilting based on structural regimes can materially improve risk-adjusted returns compared to a static 60/40 portfolio [3][10] - Bonds may offer protection in stagnation scenarios but are pricing low inflation risk, while equities could provide some inflation protection but are also elevated [3][11] Portfolio Strategy - The optimal asset mix has shifted over time, with a 40/60 equity/bond allocation being optimal in the last 25 years due to solid growth and low inflation [2][10] - Since the COVID-19 crisis, bonds have offered little benefit, and the optimal portfolio has been a mix of equities and cash based on risk tolerance [2][10] - In the coming years, a more balanced approach is recommended due to increased uncertainty around growth and inflation [11] Valuations and Macro Conditions - US 10-year bond yields are closer to their long-run average, but equity valuations, especially in the US, remain elevated [1][8] - Equity valuations outside the US and the Tech sector are less elevated, suggesting regional and sectoral differences in valuation levels [9] - The structural cycle, including trends in growth, inflation, and policy, will condition 60/40 portfolio performance and valuations [9][19] Strategic Tilting and Asset Allocation - Strategic tilting based on structural regimes has historically improved risk-adjusted returns compared to a static 60/40 portfolio [3][10] - Real assets (TIPS, commodities, real asset stocks) and growth stocks can enhance diversification, with real assets currently looking cheap and growth stocks expensive [3][11] - The optimal asset mix has historically varied significantly, with periods favoring higher equity allocations (e.g., 1970s, 1990s) and others favoring bonds (e.g., post-GFC) [80][81] Long-Term Return Forecasting - A building block approach combining valuations and macro conditions provides better long-term return forecasts for 60/40 portfolios than valuations alone [50][52] - The model incorporates starting valuations, trend growth, inflation, and profitability to forecast long-term returns for equities and bonds [50][52] - Strategic tilting based on macro conditions can enhance Sharpe ratios, especially during periods of extreme structural regime shifts [86][92] Real Assets and Growth Stocks - Real assets have historically outperformed during periods of high inflation, providing diversification benefits for 60/40 portfolios [100][103] - Growth stocks, particularly in the Tech sector, have outperformed during periods of high productivity growth, such as the 1990s and the current AI-driven cycle [101][103] - Strategic tilts towards real assets and growth stocks can improve risk-adjusted returns, especially in extreme structural scenarios like stagflation or high productivity growth [106][113]