Evaluating Capital Market Expectations

In the current economic landscape, a portfolio manager is tasked with evaluating the capital market expectations for the next five years. Recent reports indicate a moderate increase in inflation rates and a projected slowing of GDP growth due to tightening monetary policy by central banks. Simultaneously, analysts have observed a rise in long-term bond yields and a shift in sector performance as certain industries adapt to the changing economic environment.

The portfolio manager considers three different approaches to formulating the capital market expectations: one based on historical averages, another focusing on economic fundamentals, and a third leveraging quantitative models that emphasize volatility and market sentiment. Each approach leads to differing views on returns for equities versus fixed income assets.

Given this context, which approach is most likely to provide the most accurate capital market expectations considering the current economic indicators and their implications for future asset class performance?