Market perspectives

Vanguard’s outlook for financial markets

Our 10-year annualized nominal return and volatility forecasts are based on the September 30, 2025, 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 September 30, 2025. 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: Equity forecasts reflect a 2-point range around the 50th percentile of the distribution of probable outcomes. Fixed income forecasts reflect a 1-point range around the 50th percentile. More extreme returns are possible. These return assumptions depend on current market conditions and, as such, may change over time. We make our updated forecasts available at least quarterly. 

Why stocks and gold have rallied in tandem

Research suggests that assets that deliver salient—or eye-popping—short-term returns can command investors’ attention and go on to greater gains.¹ The latest example? Gold, which had gained more than 60% this year before a nearly 6% drop on October 21. That far outpaces the still-impressive 13% gain for the Standard & Poor’s 500 Index this year.

Possible reasons for this rally include central banks’ attempts to diversify their reserves beyond the U.S. dollar and a desire to hedge against inflation. More recently, the rally may be finding support from a sense of unease accompanying the U.S. government shutdown and a realization that tariff-related uncertainty is still very much with us.

Gold is outshining the S&P 500 in 2025 amid a dual rally

Note: The chart shows changes in prices of the S&P 500 Index and gold, as represented by gold futures on the COMEX, year to date through October 17, 2025. Numbers are indexed to 1 as of January 1, 2025. Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.

Sources: Bloomberg.

Most intriguing about the gold rally, however, is that it is happening as other risk assets are also appreciating. Typically, these asset classes move in opposite directions, reflecting fundamentally different investor sentiments. Stocks are often seen as a vector of optimism, rising with strong economic prospects, technological progress, and corporate earnings growth. Gold, by contrast, is traditionally a safe haven, gaining amid inflationary fears, geopolitical instability, or other sources of uncertainty. Its appeal lies not in its yield—because it produces none—but in its perceived stability when everything else feels shaky. When both rally together, it’s fair to wonder what the market might be telling us.

Where optimism and caution coexist

It may be that today’s investors are grappling with a bifurcated outlook. On one hand, optimism is strong when one focuses on the transformative potential of AI. Corporations are pouring capital into AI-related investment with the hope that these innovations will provide outsized returns as they transform the economy and industries. Even amid concerns about hype and overvaluation, the fear of missing out is palpable. Many investors are choosing to stay invested, surmising that the long-term upside outweighs short-term volatility.

On the other hand, gold’s rally suggests that trepidation accompanies such optimism, with macroeconomic and structural concerns simmering beneath the surface. Inflation, although not rampant, remains a concern, especially given the post-COVID-19 experience and the slow return to central banks’ targets. Fiscal deficit concerns in advanced economies show no signs of abating. For investors who may assign a meaningful probability to these concerns escalating, some allocation to gold may appear logical.

The sustainability of gold’s rally will depend on whether these downside risks materialize. Like other commodities, gold, as a non-income-producing asset, can be quite volatile and prone to sharp drawdowns. Its value proposition hinges on the occurrence of a pessimism-inducing development, such as runaway inflation, significant uncertainty, or a financial crisis. If the fears driving gold’s rise prove unfounded, a correction may follow. But if they are well calibrated to the risks ahead, gold could continue to find support.

Ultimately, this rare dual rally reflects a market grappling with both extraordinary promise and profound uncertainty. We’re at a moment in time where optimism and caution coexist—and where investors must navigate both with care.

U.S. Outlook: AI-related business investment provides a GDP backstop

While our base case continues to anticipate a modest growth environment, recent data call attention to emerging upside risks worth monitoring. Chief among these is a surge in business investment, particularly in AI-related capital expenditures (capex). This wave of tech-driven capex has provided a meaningful backstop to 2025 GDP, with early data suggesting that growth otherwise would have been significantly weaker. If this momentum continues, supported by favorable financial conditions, only moderate tariff pass-through, and fiscal support, more positive growth scenarios could materialize.

However, downside risks remain, particularly in the labor market, where job creation has been subdued. More importantly, the supply side of the economy is evolving rapidly in ways that add uncertainty. Immigration trends and the anticipated productivity gains from AI are reshaping labor and output dynamics rapidly, making it increasingly difficult to distinguish cyclical fluctuations from structural shifts and introducing uncertainty around the sustainability of recent growth surprises. This evolving landscape warrants close attention, especially as policy and investment responses adapt to these new realities.

Region-by-region outlook

Notes: Values are approximate. GDP growth is defined as the annual change in real (inflation-adjusted) GDP in the forecast year compared with the previous year. Unemployment rate is as of December 2025. Core inflation is the year-over-year change in the Consumer Price Index, excluding volatile food and energy prices, as of December 2025. For Canada, monetary policy is the BoC’s year-end target for the overnight rate. For the United Kingdom, monetary policy is the Bank of England’s bank rate at year-end. For the euro area, monetary policy is the European Central Bank’s deposit facility rate at year-end. For China, monetary policy is the People’s Bank of China’s seven-day reverse repo rate at year-end. For Japan, monetary policy is the BoJ’s year-end target for the overnight rate. For the United States, monetary policy is the upper end of the Federal Reserve’s target range for the federal funds rate at year-end.

Source: Vanguard.