As we see it, it’s impossible to quantify a level of risk premium that would reflect the changes we expect in the post-WWII geopolitical regime. However, this shift does suggest to us that there’s meaningful upside risk to the risk premium from its current level. Given the inability to specify such a risk premium, it doesn’t enter our forecast for long-term equity returns, but it should be an area of concern and vigilance for long-term asset allocators.
AI’s rapid advances in the past few years add a layer of uncertainty. As we have shown, AI complicates the geopolitical picture: there’s no established way to deter it, and it boosts the inherent risk that preempting it will escalate into conflict. AI’s emergence makes future conflicts less predictable—they’ll involve a growing number of strategies determined or influenced by nonhuman actors.
This is particularly true in the case of cybersecurity risks. Unlike other geopolitical conflicts, in cyberconflicts it is much less clear who your opponent is, what stage of conflict you are in and what the optimal response should be. A particularly damaging scenario would be an AI-powered adversarial attack used to exploit vulnerabilities in supply chains, which could trigger significant social and economic disruption. Meanwhile, AI’s ability to generate and spread misinformation and believable falsehoods could well undermine the functioning of democracies.
A Riskier World, but Not a Bearish Outlook for Risk Assets
There’s little question that we’re operating in a tougher environment than the one that prevailed during the past 15 years, with much more macroeconomic uncertainty and geopolitical instability. As a result, investors should expect greater volatility in their portfolios and the prospect of greater path risk, not least because most asset-class valuations are historically elevated.
However, most investors need to earn real returns in a world of rising structural-inflation risks, so we think equities should remain a core portfolio allocation. Near term, earnings growth should provide support—the consensus expects a 12% increase globally for 2025, with robust profit margins. Longer term, our research indicates that if inflation doesn’t become unanchored above 4%, firms will generally be able to pass rising costs on to consumers, and overall market multiples don’t need to contract. We expect buybacks, currently at around 1.5% per year globally, to be another source of durable support for stocks.
This new investment regime also necessitates greater diversification of return streams when designing asset allocations, particularly higher exposure to gold and other real assets, which should help dampen the impact of inflation and geopolitical risks.
