Vanguard Releases 2026 Economic and Market Outlook

AI exuberance: Economic upside, stock market downside

VALLEY FORGE, Pa., Dec. 10, 2025 /PRNewswire/ -- Vanguard today released its annual outlook on the global economy and financial markets. This year's report, "AI exuberance: Economic upside, stock market downside," provides investors an economic roadmap and Vanguard's updated long-term investment thesis. Vanguard's global team of economists outlines the impact of artificial intelligence on the trajectory of markets, including how broader adoption of AI may affect the labor market, economic productivity and output, as well as equity and fixed income return prospects.

Financial markets are exuberant—and there are some good reasons for that. Despite major headwinds in 2025 like rising tariffs and sudden plateauing of labor supply and growth slowdowns, economies held firm. U.S. corporate earnings growth and fundamentals stayed strong, powered by AI investment and other positive technology shocks.

"We see about a 60% chance that the U.S. economy will achieve 3% real growth in the coming years," said Joe Davis, Global Chief Economist and Global Head of Investment Strategy Group. "But this future is not quite now for 2026. For next year, how well AI investment will counteract negative (supply-side) shocks shapes our economic outlook. Balancing these near- and medium-term views shapes Vanguard's investment outlook, which identifies somewhat unconventional, yet compelling investment opportunities for today's frothy financial markets."

United States economic forecasts

Higher growth is on the horizon, particularly for the U.S.
AI investment's outsized contribution to economic growth represents the key risk factor.

In 2026, the U.S. is positioned for a more modest acceleration in growth to about 2.25%, supported by AI investment and fiscal tailwind from the One Big Beautiful Bill Act. The first half of the year may be softer given the lingering stagflationary effects of tariffs and labor supply plateauing, as well as yet-to-materialize broad-based gains in worker productivity. Labor markets, which cooled markedly in 2025, should stabilize by the end of 2026, helping keep the unemployment rate below 4.5%. Economic growth is expected to keep U.S. inflation somewhat persistent, remaining above 2% by the close of 2026. This combination of solid growth and still-sticky inflation suggests that the Federal Reserve will have limited scope to cut rates below our estimated neutral rate of 3.5%. Our Fed forecast is a bit more hawkish than the bond market's expectations.

Given similar AI-related dynamics, our forecast for China's economic growth in 2026 is also above consensus expectations. Despite ongoing external and structural challenges, real GDP growth is more likely to register 5% than 4%. Conversely, our risk assessment for the euro area is more consensus-like given the lack of strong AI dynamics. We anticipate growth to hover near 1% in 2026, as the drag from higher U.S. tariffs is offset by increased defense and infrastructure spending. Inflation should stay close to the 2% target, allowing the European Central Bank to maintain its current policy stance throughout the year. 

Investment outlook favors bonds, value and international equities

IMPORTANT: The projections and other information generated by the VCMM regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Distribution of return outcomes from VCMM are derived from 10,000 simulations for each modeled asset class. Simulations as of 10/31/2025. Results from the model may vary with each use and over time. For more information, please see below.

Overall, our medium-run outlook for multi-asset portfolios remains constructive, with positive after-inflation returns likely to continue. In 2026, U.S. technology stocks could well maintain their momentum given the rate of investment and anticipated earnings growth. But let us be clear: Risks are growing amid this exuberance, even if it appears "rational" by some metrics. More compelling investment opportunities are emerging elsewhere even for those investors most bullish on AI's prospects. Our conviction in this view is growing, and it parallels investment returns in previous technology cycles. Our capital market projections show that the strongest risk-return profiles across public investments over the coming 5-to-10 years are, in order:

(1) High-quality U.S. fixed income
(2) U.S. value-oriented equities
(3) Non-U.S. developed-market equities

We maintain our secular view that high-quality bonds (both taxable and municipal) offer compelling real returns given higher neutral rates. Returns should average near current portfolio income levels, a comfortable margin over the rate of expected future inflation. That's the primary reason why bonds are back, regardless of what central banks do in 2026. Importantly, U.S. fixed income should also provide diversification in a world where AI disappoints leading to lower growth.

We remain most guarded in our assessment of U.S. growth stocks. Our muted expected returns for the technology sector are entirely consistent with our more bullish prospects for an AI-led U.S. economic boom. The heady expectations of U.S. technology stocks are unlikely to be met for at least two reasons. The first is the already-high earnings expectations and the second is the typical underestimation of creative destruction from new entrants into the sector which erodes aggregate profitability. Our muted U.S. stock return forecast of 4%–5% average returns over the next 5-to-10 years is nearly single-handedly driven by our risk-return assessment of large-cap technology companies.

Both U.S. value-oriented and non-U.S. developed-market equities should benefit most over time as AI's eventual boost to growth broadens to consumers of AI technology. Economic transformations are often accompanied by such equity market shifts over the full technology cycle.

"Despite the glamor of the tech-heavy U.S. equity market, more compelling investment opportunities are emerging in high-quality fixed income, U.S. value, and ex-U.S. equity—even for those investors most bullish on AI's prospects," concludes Mr. Davis. "Long-term investors will continue to benefit from a portfolio consisting of fixed income and globally diversified equities."

About Vanguard

Founded in 1975, Vanguard is one of the world's leading investment management companies. The firm offers investments, advice, and retirement services to tens of millions of individual investors around the globe - directly, through workplace plans, and through financial intermediaries. Vanguard operates under a unique, investor-owned structure where Vanguard fund shareholders own the funds, which in turn own Vanguard. As such, Vanguard adheres to a simple purpose: To take a stand for all investors, to treat them fairly, and to give them the best chance for investment success. For more information, visit vanguard.com.

IMPORTANT: The projections and other information generated by the Vanguard Capital Markets Model (VCMM) regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. VCMM results will vary with each use and over time.

The VCMM projections are based on a statistical analysis of historical data. Future returns may behave differently from the historical patterns captured in the VCMM. More importantly, the VCMM may be underestimating extreme negative scenarios unobserved in the historical period on which the model estimation is based.

The Vanguard Capital Markets Model® is a proprietary financial simulation tool developed and maintained by Vanguard's primary investment research and advice teams. The model forecasts distributions of future returns for a wide array of broad asset classes. Those asset classes include U.S. and international equity markets, several maturities of the U.S. Treasury and corporate fixed income markets, international fixed income markets, U.S. money markets, U.S. municipal bonds, commodities, and certain alternative investment strategies. The theoretical and empirical foundation for the Vanguard Capital Markets Model is that the returns of various asset classes reflect the compensation investors require for bearing different types of systematic risk (beta). At the core of the model are estimates of the dynamic statistical relationship between risk factors and asset returns, obtained from statistical analysis based on available monthly financial and economic data from as early as 1960. Using a system of estimated equations, the model then applies a Monte Carlo simulation method to project the estimated interrelationships among risk factors and asset classes as well as uncertainty and randomness over time. The model generates a large set of simulated outcomes for each asset class over time. Forecasts represent the distribution of geometric returns over different time horizons. Results produced by the tool will vary with each use and over time.

All investing is subject to risk, including the possible loss of the money you invest.

Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.

Diversification does not ensure a profit or protect against a loss.

Investments in bonds are subject to interest rate, credit, and inflation risk.

Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. These risks are especially high in emerging markets.

SOURCE Vanguard