Market perspectives

Vanguard’s outlook for financial markets

Our 10-year annualized nominal return and volatility forecasts are shown below. They are based on the June 30, 2024, running of the Vanguard Capital Markets Model^® (VCMM). Equity returns reflect a 2-point range around the 50^th percentile of the distribution of probable outcomes. Fixed income returns reflect a 1-point range around the 50^th percentile. More extreme returns are possible. 

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 June 30, 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.

Region-by-region outlook

United States

The Federal Reserve cut its policy interest rate by 0.5 percentage points on September 18, to a range of 4.75%–5.0%, but did so in the context of economic resilience rather than concerns about a material slowdown. We expect:

• The Fed to cut its rate target by an additional 50 basis points this year, ending at 4.25%-4.50%. We foresee additional cuts in 2025 that would bring the policy rate toward the neutral rate, which we peg at a nominal 3.50%.
• Economic growth to cool but remain at a near-trend pace of 2.0% by year-end.
• The pace of core inflation, measured by the Fed’s preferred gauge of personal consumption expenditures, to rise by year-end to 2.90% on a year-over-year basis because of base effects or challenging comparisons with year-earlier data.
• The unemployment rate ending the year marginally above current levels. It measured 4.20% in August.

Euro Area

On September 12, the central bank announced the second cut to its policy interest rate of the new policy cycle that began in June. We expect:

• The European Central Bank to trim its deposit facility rate by another quarter-point in December and a quarterly cadence of quarter-point cuts next year, which would leave the policy rate at 3.25% at year-end 2024 and 2.25% at year-end 2025. The balance of risks skews toward even greater easing.
  
• Year-over-year headline inflation to remain around 2.20% and core inflation to fall to about 2.60% at year-end, before reaching the ECB’s 2.0% target in 2025.
• The unemployment rate to end 2024 around current levels—it stood at a record-low 6.40% in July—though lower corporate profit margins skew risks to the upside.
• Full-year economic growth of only about 0.80%, as restrictive monetary and fiscal policy constrain activity.

United Kingdom

Although services inflation, pay growth, and GDP data have all recently undershot expectations, an 8-1 September 19 vote by central bank policymakers to maintain their 5.0% policy interest rate acknowledged that risks to resurgent inflation remained. We expect:

• The Bank of England (BOE) to cut the bank rate in November, with the policy rate ending 2024 at 4.75%, and quarterly 0.25-percentage-point cuts in 2025. Even greater easing seems more likely than less easing.
• Economic growth to moderate in the second half of the year, leaving full-year growth of 1.20%.
• Core inflation to end 2024 around 2.80% year over year—it stood at 3.60% in August—and to hit the BOE’s 2.0% target by the second half of 2025.
• The unemployment rate to end 2024 in a range of 4.0%–4.5%, with risks skewed to the upside. The rate stood at 4.10% in the May–July period.

China

Sluggish domestic demand highlights the risk that China’s target of 5.0% economic growth this year may not be met. Increased government loan issuance in August provides hope, but more of the same will likely be required in the months ahead. We expect:

• A 0.1 percentage point cut this year in the seven-day reverse repo rate, the policy rate of the People’s Bank of China. The policy rate stands at 1.70%. There may be further reductions in banks’ reserve requirement ratios as well.
  
• That China will still reach its economic growth target for 2024—provided that a sufficiently timely policy response occurs.
  
• Mild reflation this year, with headline inflation of 0.80% and core inflation, which excludes food and energy prices, of 1.00%. Producer prices fell on a year-over-year basis for the 23rd consecutive month in August.

A recent rapid decline in its money supply highlights deflationary concerns in China. The GDP deflator, a broad, inflation-adjusted measure of economic output, has been negative for five consecutive quarters. Judging by recent experiences in the United States and Japan, China will be challenged in its efforts to lift barely positive consumer inflation closer to the People’s Bank of China’s 3.0% target.

Grappling with a property-driven slowdown, China has introduced several stimulative measures this year. Most have been aimed at the supply side.

“Policy aimed at stoking demand to boost confidence among China’s consumers is likely required in addition to the supply-side measures,” said Grant Feng, a Vanguard senior economist who studies the Asia-Pacific region. “People won’t spend on goods and services if they expect that prices will be lower next month. That would mean further downward pressure on prices and a harder road back toward potential growth.”

Our chart reflects a relatively swift return to previous M2 money-in-circulation levels in the United States following the global financial crisis, which was aided by timely consumer-focused stimulus. “A quick and decisive policy response is critical to fighting deflationary risk,” said Qian Wang, Vanguard chief economist for the Asia-Pacific region. “The U.S. after the global financial crisis offers a good example of this, whereas Japan in the 1980s and 1990s lacked a swift and sufficient response. There is a good lesson for China in these experiences.”

Emerging markets

Services inflation remains sticky in most emerging markets, but that hasn’t stopped a cycle of interest rate cuts as broader inflation readings approach central bank targets. Since our economic survey last month, policy rates have been reduced by 0.25 percentage points in such markets as Chile, the Philippines, the Czech Republic, and Mexico.

A notable exception is Brazil, where the central bank raised its policy rate to 10.75% on September 18, reversing a cutting cycle that began in August 2023. Brazil’s currency, the real, has depreciated by 13.00% against the U.S. dollar since the start of the year, through September 17.

In Mexico, we expect:

• Another 0.5–1 percentage point of policy interest rate cuts in 2024, to a year-end range of 9.75%–10.25%, levels that would still be restrictive.
• The rate of core inflation to finish 2024 near the upper end of Banxico’s 2.00%–4.00% target range. It stood at 4% on a year-over-year basis in August.
• Full-year economic growth of 1.75%–2.25%. We’ll be watching for signs of restrictive policy rates weighing on consumption and fixed asset investment.