Market perspectives

Market perspectives

Vanguard Perspective

July 29, 2025

The views below are those of the global economics and markets team of Vanguard Investment Strategy Group as of July 23, 2025.

Over the long term, the U.S. dollar appears fairly valued. While we continue to expect international equity to outperform, the gains are likely to come from corporate fundamentals rather than dollar-weakening.

Although uncertainty remains around U.S. tariff policy, we’re likely to see modest economic growth along with further rate cuts by a number of major central banks in the second half of 2025.

Markets forecasts

Vanguard’s outlook for financial markets

Our 10-year annualized nominal return and volatility forecasts are based on the June 30, 2025, running of the Vanguard Capital Markets Model®.

A table compares the return forecast ranges and median volatility of over 20 asset classes, illustrating the trade-offs between expected returns and risk. U.S. equities have a moderate return forecast (3.3% to 5.3%) with 15.2% volatility. Global ex-U.S. equities show higher return potential (5.1% to 7.1%) but also higher volatility at 18.8%. Global equities, especially developed markets ex-U.S. (5.7% to 7.7%), also show higher return potential and higher volatility (18.2%). Emerging markets equities have the highest volatility among equities (25.3%) with a lower return range (3.1% to 5.1%). Within U.S. equities, value stocks (5.8% to 7.8%) outperform growth stocks (1.9% to 3.9%) in return forecasts, though both carry significant volatility (18.7% and 16.2%, respectively). Large-cap stocks (3.1% to 5.1%) moderately outperforms growth stocks, but has lower return potential than value stocks, with lower volatility at 15.0%. Small-cap stocks (5% to 7%) and REITs (3% to 5%) also show higher volatility (19.9% and 18.4%, respectively). Bond categories show lower volatility but also lower returns. U.S. aggregate bonds (4% to 5%) have 6.3% volatility, while U.S. Treasury bonds (3.8% to 4.8%) and credit (4.2% to 5.2%) are slightly more volatile. High-yield corporate bonds (4.7% to 5.7%) and emerging markets sovereign bonds (5.4% to 6.4%) offer higher returns but with volatility nearing or exceeding 10%. U.S. Treasury Inflation-Protected Securities (TIPS) are projected to return between 2.8% and 3.8%, with a median volatility of 5.1%. U.S. mortgage-backed securities offer slightly higher returns of 4.4% to 5.4%, with lower volatility at 4.2%. U.S. municipal bonds are expected to return 3.5% to 4.5% with 4.8% volatility, while high-yield municipal bonds offer 4% to 5% returns at a higher volatility of 7.8%. Cash instruments show the lowest volatility: U.S. cash has a return range of 3% to 4% with 1.1% volatility, and U.S. municipal cash yields 4.5% to 6.5% with just 0.5% volatility. U.S. inflation is forecasted between 1.5% and 2.5%, with 1.8% volatility. Finally, the Vanguard U.S. Dollar Index shows a narrow return range from −0.7% to +0.3%, with higher volatility at 8.4%. The chart emphasizes the fundamental investment principle that higher potential returns generally come with higher risk. It encourages investors to consider both return expectations and volatility when building diversified portfolios, balancing growth opportunities with risk tolerance. — 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 June 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.

Markets in focus

Expect currency to play a smaller role in future returns

For the past three years, the U.S. dollar stood tall—overvalued and seemingly defying its fundamental gravity. But in recent months, it’s come back down to a level that we have assessed as correctly reflecting long-term fair value compared with a basket of developed-market currencies.

The downward shift has been a gift to globally diversified U.S. investors. As the dollar weakened—triggered in part by a global reconsideration of appetite for U.S. assets amid tariff upheaval—international equity returns surged when translated back into dollars, giving portfolios a meaningful lift.

International returns also benefited from depressed valuations that reflected very pessimistic sentiment at the start of the year. Looking ahead, the degree to which corporate fundamentals abroad can rise to meet this renewed optimism will be key for further international equity gains.

The U.S. dollar has retreated to fair-value territory

A line chart shows the U.S. dollar’s evolving value over time. The x-axis represents years, with labels ranging from 1992 to 2024 in four-year increments. The y-axis represents the dollar’s value against an equity market-capitalization-weighted basket of five developed-market currencies, with labels ranging from 60 to 120. During the intervening years, the value peaks at 119.89 in January 2002 and bottoms out at 73.55 in April 2011. — **Notes:** The chart shows our fair-value estimate for the U.S. dollar against an equity market capitalization-weighted basket of the euro, the Japanese yen, the British pound, the Canadian dollar, and the Australian dollar. The fair-value estimate is based on the part of exchange-rate movements that can be explained through differentials in relative economic strength, measured by productivity (GDP per capita at purchasing power parity) and long-term real rates.

**Sources:** Vanguard calculations, based on data from Refinitiv and the International Monetary Fund, as of June 30, 2025.

With the dollar now firmly back within our estimated fair-value range, we view the risks as more balanced than at any time during the last three years. Over the short term, an easing of trade tensions and greater certainty around U.S. policy may lead to dollar appreciation. Alternatively, a continued reconsideration of dollar-denominated assets among global investors could result in further declines. Longer term, however, we see higher U.S. productivity and persistently higher (but sustainable) U.S. interest rates as supportive of the current dollar valuation.

The shift reinforces the case for global diversification. With U.S. equity valuations still stretched and international markets offering more historically grounded return prospects, spreading risk across regions remains a cornerstone of a sound long-term strategy.

Economic forecasts

United States: A resilient first-half performance

The U.S. economy has remained resilient despite significant economic policy uncertainty through the first half of 2025. The labor market has gracefully decelerated so far this year and remains in a balanced position. It has averaged roughly 150,000 jobs per month over both the previous three months and the last year, highlighting an uncommon period of stability.

Fiscal policy is now more certain with the recent passing of the One Big Beautiful Bill Act. We presently expect a modest boost to growth in 2026 in light of these circumstances, with deficit-impact concerns remaining a key focus of market participants.

Inflation data has continued to come in lower than expected by market participants. Our analysis finds that the primary cause has been the “frontrunning effect.” Despite a sharp rise in announced tariff rates, substantial import frontrunning early in the year has muted the inflationary impact and will likely continue to do so throughout 2025. However, the June Consumer Price Index report indicated accelerated increases in core goods prices, suggesting that companies are beginning to pass tariff costs on to consumers.

We expect a modest pickup in core goods inflation in the second half and see the core Personal Consumption Expenditures price index ending 2025 around 3% year-over-year. It is worth noting that the frontrunning effect is not a free lunch—it has muted the near-term impact of increased tariffs but will modestly prolong their effects into 2026.

Region-by-region outlook

Year-end outlook by country	GDP growth	Unemployment rate	Core inflation	Monetary policy
Canada	1.25%	7.50%	2.50%	2.25%
China	4.80%	5.01%	0.50%	1.30%
Euro area	1.10%	6.30%	2.10%	1.75%
Japan	0.70%	2.40%	2.40%	0.75%
Mexico	<1.00%	3.20–3.60%	3.50%	7.50%
United Kingdom	1.10%	4.80%	3.0%	3.75%
United States	1.50%	4.70%	3.00%	4.00%

Source: Vanguard.

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.

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Notes:

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.

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.

About the Vanguard Capital Markets Model

The asset-return distributions shown here are in nominal terms—meaning they do not account for inflation, taxes, or investment expenses—and represent Vanguard’s views of likely total returns, in U.S. dollar terms, over the next 10 years; such forecasts are not intended to be extrapolated into short-term outlooks. Vanguard’s forecasts are generated by the VCMM and reflect the collective perspective of our Investment Strategy Group. Expected returns and median volatility or risk levels—and the uncertainty surrounding them—are among a number of qualitative and quantitative inputs used in Vanguard’s investment methodology and portfolio construction process. Volatility is represented by the standard deviation of returns.

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.