Market perspectives
Vanguard Perspective
|December 6, 2024
Vanguard Perspective
|December 6, 2024
The views below are those of the global economics and markets team of Vanguard Investment Strategy Group as of as of December 4, 2024.
We attribute the U.S. economy’s strong GDP growth, low unemployment, and cooling inflation to recent labor and productivity gains.
We anticipate the Fed will reduce its rate target further in 2025 to a range of 3.75%–4.00%.
While China’s economy has regained some ground, we expect their 2025 outlook will hinge on policy support and potential U.S. tariff hikes.
Projected returns
Our 10-year annualized nominal return and volatility forecasts are shown below. They are based on the November 8, 2024, running of the Vanguard Capital Markets Model® (VCMM). Equity returns reflect a 2-point range around the 50th percentile of the distribution of probable outcomes. Fixed income returns reflect a 1-point range around the 50th percentile. More extreme returns are possible.
Equities |
Return projection | Median volatility |
---|---|---|
U.S. equities: | 2.8%–4.8% | (16.9%) |
Global equities ex-U.S. (unhedged): | 6.9%–8.9% | (18.5%) |
Global ex-U.S. developed markets equities (unhedged): | 7.3%–9.3% | (16.8%) |
Emerging markets equities (unhedged): | 5.2%–7.2% | (26.1%) |
U.S. value: | 4.2%–6.2% | (19.2%) |
U.S. growth: | 0.4%–1.6% | (17.8%) |
U.S. large-cap: | 2.5%–4.5% | (16.5%) |
U.S. small-cap: | 4.2%–6.2% | (22.4%) |
U.S. REITs: | 3.8%–5.8% | (20.1%) |
Fixed income | Return projection | Median volatility |
---|---|---|
U.S. aggregate bonds: | 4.3%–5.3% | (5.7%) |
Global bonds ex-U.S. (hedged): | 4.3%–5.3% | (4.5%) |
U.S. Treasury bonds: | 4.1%–5.1% | (6.0%) |
U.S. intermediate credit: | 4.6%–5.6% | (5.2%) |
U.S. high-yield corporate: | 5.3%–6.3% | (10.1%) |
Emerging markets sovereign: | 5.0%–6.0% | (9.8%) |
U.S. TIPS: | 3.4%–4.4% | (5.1%) |
U.S. cash: | 3.1%–4.1% | (1.4%) |
U.S. inflation: | 1.9%–2.9% | (2.4%) |
Notes: These probabilistic return assumptions depend on current market conditions and, as such, may change over time.
Source: Vanguard Investment Strategy Group.
IMPORTANT: The projections or other information generated by the Vanguard Capital Markets Model® 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 the VCMM are derived from 10,000 simulations for each modeled asset class. Simulations are as of November 8, 2024. Results from the model may vary with each use and over time. For more information, see the Notes section at the end of this article.
United States
The U.S. economy has achieved a favorable balance of strong GDP growth, low unemployment, and cooling inflation. We attribute this confluence to recent supply dynamics—labor force and productivity growth—that have shaped the economic landscape over the past two years.
We expect:
Europe
The euro area economy has struggled amid a deep downturn in manufacturing and restrictive monetary and fiscal policies weighing on services demand. In 2025, we expect growth to remain below trend and the European Central Bank (ECB) to cut rates below neutral.
We expect:
United Kingdom
The U.K. economy recovered in 2024, but growth has been uninspiring, and productivity has been weak. We expect growth to accelerate above trend, driven by fiscal stimulus, in 2025.
We expect:
China
China’s economy has regained some ground, buoyed by improved domestic demand on the strength of recent fiscal stimulus. The outlook for 2025 will hinge on the degree of policy support and potential U.S. tariff increases.
We expect:
Emerging markets
In many emerging markets, proactive policymaking has led to significant progress in reducing inflation. Indeed, most central banks in these markets felt comfortable enough to start easing policy from restrictive levels ahead of their developed markets counterparts. In 2025, we expect the easing cycle across emerging markets to both continue and broaden, with rates remaining in restrictive territory.
The central bank in Brazil raised its policy Selic rate again in November to 11.25%, accelerating the pace of its rate increases amid renewed inflationary pressures. Year-over-year headline inflation jumped to 4.76% in October, above the upper end of a 1.50-percentage-point tolerance band around the bank’s 3.00% inflation target.
The economy in Mexico surged in the third quarter, but restrictive interest rates and U.S.-related policy uncertainty make us bearish on Mexico, where we expect growth in a range of 1.25%–1.75% in 2025. The pace of core inflation, which excludes volatile food and energy prices, fell for the 21st straight month, to 3.80% year over year. We expect core inflation to fall to 3.25%–3.50% in 2025, above the midpoint of the 2.00%–4.00% target range set by the Bank of Mexico.
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Notes:
All investing is subject to risk, including the possible loss of the money you invest.
Investments in bonds are subject to interest rate, credit, and inflation risk.
Investments in stocks and 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.
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 important, 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, 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 several time horizons. Forecasts are obtained by computing measures of central tendency in these simulations. Results produced by the tool will vary with each use and over time.