We are screwed.
(At least if your plan is “own U.S. large caps and hope for the best.”)
I just finished reading AQR’s latest Capital Market Assumptions, and a few things really stood out.
At the start of 2026:
- The U.S. CAPE ratio is near 40, putting it in the 96th percentile since 1980
- Non-U.S. developed markets are sitting around their historical median
- U.S. large caps offer the lowest expected return of any major equity market
Valuations are an almost useless predictor of short-term returns.
But over a decade?
This is a math problem.
So we want to look at other return sources to add to our portfolios.
AQR’s aggregate valuations across styles are actually near long-term averages. Those are things like value, momentum, quality, etc.
Their conclusion (paraphrased):
A diversified portfolio of long/short factor premia, run at ~10% volatility, has an expected return of ~7% over cash.
If your portfolio is:
- U.S.-centric
- Long-only
- Equity beta masquerading as “diversification”
The next decade is likely going to be harder than the last one.
That doesn’t mean panic.
It just means it might be time to update the playbook.
Broader opportunity sets and strategies designed to survive multiple regimes matter a lot more from here.
You can read their writeup here: AQR CMAs