Market perspectives

Vanguard’s outlook for financial markets

Our 10-year annualized nominal return and volatility forecasts are based on the March 31, 2026, running of the Vanguard Capital Markets Model®.

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 are as of March 31, 2026. Results from the model may vary with each use and over time. For more information, please see the Notes section below.

Source: Vanguard Investment Strategy Group.

Notes: These return assumptions depend on current market conditions and, as such, may change over time. We make our updated forecasts available at least quarterly. 

Between earnings momentum and AI-enabled profitability

At the start of 2026, we anticipated continued earnings momentum, with risks skewed to the upside. At midyear, that view has largely been borne out. The near-term backdrop remains favorable, supported by a still-powerful AI investment cycle, strong earnings momentum, and room for further positive earnings surprises.

Yet a central point of tension has come into focus between the durability of earnings momentum in the near term and the ability of AI investment to deliver broad-based, sustainable profitability in the medium term. With elevated earnings expectations already priced in, the path for sustained return momentum beyond the near term appears narrow.

Returns are being earned, so far

U.S. equities have continued to climb, rising roughly 10% so far this year. Those gains have been driven by earnings growth—both realized earnings and upwardly revised expectations—rather than further valuation expansion.

Returns across global markets have similarly tracked strengthening earnings. Indeed, markets with the largest upward revisions to earnings expectations have delivered the strongest returns. Asia-Pacific ex-Japan—notably South Korea and Taiwan—has performed the best, with earnings expectations for the next few years having risen by more than 30%. In contrast, European markets have lagged most other regions, reflecting their relatively modest 2% increase in expected earnings growth.

A similar pattern has played out in the U.S. market. Firms in semiconductors, semiconductor equipment, and technology hardware subsectors have delivered the highest returns—again backed by upward earnings growth revisions of more than 30% over the next few years. Health care and financials, with minimal revisions to earnings, have lagged markedly.

The expected rate of earnings growth for the rest of 2026 is running meaningfully above the pace of recent years. AI capital expenditure, surpassing earlier projections, is at the center of this dynamic.

A relatively small group of roughly 70 companies globally is driving a historically large, physically intensive buildout centered on semiconductors and AI infrastructure. This “AI complex” comprises companies undertaking AI infrastructure buildout—including “hyperscalers” Alphabet, Amazon, Meta, Microsoft, and Oracle—and companies across the semiconductor stack, data centers, and networking infrastructure that benefit from hyperscaler spending. For this year and next, we expect this AI complex to generate more than half of all U.S. earnings growth.

Where U.S. earnings growth is coming from

Source: Vanguard calculations, based on data from Bloomberg, as of June 12, 2026.

Notes: “Hyperscalers” refer to the five firms that are driving AI capital expenditure: Alphabet, Amazon, Meta, Microsoft, and Oracle. “Rest of AI Complex” refers to roughly 30 firms in the U.S. that are benefiting from this AI-buildout-driven surge in demand.

Near-term momentum is intact, but the bar keeps rising

In the near term, the forces supporting earnings momentum are likely to persist, perhaps even strengthen. Most hyperscalers—the large cloud service providers funding the AI buildout—appear able to balance continuing earnings growth with the demands of funding historic capital expenditure, supported partly by increased debt issuance and equity offerings. With the AI investment cycle strengthening, near-term risks to AI complex earnings remain tilted to the upside.

Nonetheless, we anticipate significant market volatility. Although swings could be triggered by a higher-for-longer rate environment or geopolitical developments, market drivers are increasingly concentrated around the AI buildout. As we continue to learn what the economics of AI look like in practice—the trajectory of AI capital expenditure, how effectively hyperscalers can monetize AI investment, and the size and shape of AI’s addressable market—the market’s sensitivity to the ups and downs is likely to be significant. Investors should expect a bumpy ride.

From AI buildout to AI diffusion: Where long-term value accrues

Our outlook for the medium term is more guarded than for the near term, for two reasons:

• The historic scale of investment by hyperscalers raises questions about whether returns will ultimately justify the capital deployed. Outcomes are unlikely to be uniform. Some firms may emerge as more profitable and with significant competitive advantages, while others—and parts of the broader AI complex—could be vulnerable if spending slows.

• The question that ultimately determines returns is not just who builds AI infrastructure, but who captures its economic benefits. As AI adoption broadens, opportunities may shift beyond the AI complex to areas such as U.S. value stocks and developed markets, where companies can improve productivity without bearing upfront investment costs.

Diversification remains the best defense against concentrated risk

Where does this leave investors? If this outlook holds, volatility is likely to remain elevated as markets balance near-term earnings strength with uncertainty around where AI benefits ultimately will accrue. Time horizon matters. Earnings momentum may drive returns in the short term, but over longer periods, valuations tend to anchor outcomes. Fixed income also remains a key diversifier given its current risk-return profile.

In this environment, clarity and discipline are critical. Staying focused on investment goals—and maintaining diversification across asset classes and themes—can help avoid overconcentration in the AI buildout.

United States: Trajectory of inflation to constrain policy

Near the halfway point of the year, our U.S. outlook remains constructive, supported by strong AI-driven investment, resilient consumers, and solid job growth.

However, inflation pressures have reemerged, with core inflation now expected to finish the year above 3%, driven by persistent services inflation and factors such as tariffs and higher energy prices.

The labor market remains healthy, though hiring may slow in the near-term. We expect unemployment to stabilize in the mid-4% range, consistent with full employment.

Given this backdrop, the Federal Reserve is likely to remain on hold. We no longer expect a rate cut in 2026 and anticipate policy will stay at current levels through 2027.

Source: Vanguard.

Notes: Forecasts are as of June 24, 2026. For the U.S., GDP growth is defined as the fourth-quarter-over-fourth-quarter change in real (inflation-adjusted) GDP in the forecast year compared with the previous year. For the euro area, Japan, and China, growth is defined as the annual change in GDP in the forecast year compared with the previous year. The unemployment rate is as of December for each year. For the U.S., core inflation is the year-over-year percentage change in the Personal Consumption Expenditures price index, excluding volatile food and energy prices, as of December for each year. For the euro area, core inflation is the year-over-year change in the Harmonized Index of Consumer Prices, excluding volatile energy, food, alcohol, and tobacco prices, as of December for each year. For Japan, core inflation is the year-over-year change in the Consumer Price Index, excluding volatile fresh food prices, as of December for each year. For China, core inflation is the year-over-year change in the Consumer Price Index, excluding volatile food and energy prices, as of December for each year. For the U.S., monetary policy is the rounded midpoint of the Federal Reserve’s target range for the federal funds rate at year-end. For the euro area, monetary policy is the European Central Bank’s deposit facility rate at year-end. For Japan, monetary policy is the Bank of Japan’s year-end target for the overnight rate. For China, monetary policy is the People’s Bank of China’s seven-day reverse repo rate at year-end.