Market perspectives
Vanguard Perspective
|May 27, 2026
Market perspectives
The views below are those of the global economics and markets team of Vanguard Investment Strategy Group as of May 20, 2026.
Earnings growth expectations are rising and broadening beyond mega-cap tech stocks, supported by AI-driven investment and improving momentum across small-cap, value, and emerging markets.
U.S. growth remains resilient, but sticky inflation and elevated energy prices are likely to keep the Fed cautious on rate cuts.
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Markets forecasts
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.
Markets in focus
Earnings momentum builds beyond large-cap tech
Corporate earnings expectations are rising, even compared with the generally rosy view from the last quarter or two. The direction appears clearly higher over the next couple of years, driven by areas beyond U.S. growth and the Magnificent Seven.
The pace of earnings growth is running measurably above that of the last few years. At the same time, momentum is broadening. This pattern of rising expected earnings relative to the recent past is most pronounced in small-cap, value, and emerging markets. The pickup is more muted among U.S. growth and the Magnificent Seven.
This is evident in the widening gap between forecasted earnings-per-share growth for the next 12 months and actual earnings-per-share growth for the previous 12 months for both U.S. and emerging markets equities.
The gap between forecasted and trailing earnings has widened
Sources: Vanguard calculations, based on data from Bloomberg, as of May 11, 2026.
Notes: This chart shows the gap between forecasted earnings-per-share growth for the next 12 months and actual earnings-per-share growth for the previous 12 months for the MSCI USA Index and the MSCI Emerging Markets Index.
The AI buildout cycle is a key trend driving this stronger and broader earnings momentum. The ever-increasing AI capital spending of hyperscalers—big technology companies that build and operate vast, AI‑optimized cloud infrastructure—is estimated at about $800 billion for the year. This outlay is already translating into consistently better‑than‑expected income for companies tied to the global AI infrastructure supply chain. Beneficiaries include companies in the lithography, foundry, memory, and storage areas of semiconductor manufacturing.
Attention within the AI ecosystem has shifted to high-bandwidth memory chips, which are essential for inference-heavy tasks and AI agents where low latency is crucial. This focus has driven rapid earnings growth and strong performance for companies like Micron Technology and SanDisk in the U.S. and SK Hynix and Samsung in Korea.
Beyond semiconductors, sectors involved in constructing and operating data centers—including energy, utilities, industrials, and materials—are also benefiting. As AI adoption expands, companies throughout the economy stand to gain from increased productivity.
The evolution of current trends is likely to hinge on a few key questions:
- Will the AI infrastructure buildout continue to strengthen, supporting semiconductors and Korea- and Taiwan-related earnings?
- How effectively will AI hyperscalers—such as Amazon, Alphabet, Meta, and Microsoft—monetize their AI spending?
- Will early signs of AI’s spread begin to lift earnings and margins across sectors that use AI?
All three issues bear monitoring. They hold the key to shaping the earnings growth profile of the global equity market that has been, and will continue to be, shaped by AI.
Economic forecasts
United States: A constructive outlook with a close eye on inflation
The U.S. economic outlook remains constructive, supported by continued strength in business investment and generally resilient household demand. That said, energy prices have remained elevated. We’d need to see some near-term moderation for recent economic trends to continue.
We continue to view the labor market as fundamentally resilient, albeit transitioning toward a slower growth phase. Heavily concentrated job creation in health care continues to reflect structural demand in health care services, a trend we expect to persist over the coming years. We continue to see AI‑related displacement as a limited risk in 2026.
Inflation has remained stubbornly elevated early in the year, prompted by the continued pass-through of tariffs and early energy-spike effects from the Middle East conflict. We expect elevated non‑housing services inflation to moderate in the months ahead. Should that remain sticky, it will be difficult for core inflation to fall below 3% this year.
For now, continued conflict in the Middle East and high energy prices will bias the Federal Reserve toward inaction, although elevated inflation will keep the central bank vigilant to potential changes in inflation expectations. We retain our expectation for a single policy rate cut in 2026, consistent with where we anticipate a narrowed and slim bias of the Federal Open Market Committee to remain.
Region-by-region outlook
| YEAR-END OUTLOOK BY COUNTRY | GDP GROWTH | UNEMPLOYMENT RATE | CORE INFLATION | MONETARY POLICY |
|---|---|---|---|---|
| Canada | 1.80% | 6.50% | 2.20% | 2.25% |
| China | 4.70% | 5.10% | 1.20% | 1.40% |
| Euro area | 0.80% | 6.40% | 2.20% | 2.50% |
| Japan | 0.80% | 2.40% | 2.10% | 1.25% |
| Mexico | 1.30% | 3.30% | 4.10% | 6.50% |
| United Kingdom | 1.10% | 5.30% | 2.80% | 4.25% |
| United States | 2.30% | 4.60% | 2.80% | 3.40% |
Source: Vanguard.
Notes: 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 2026. Core inflation is the year-over-year change in the Consumer Price Index, excluding volatile food and energy prices, as of December 2026. For Canada, monetary policy is the Bank of Canada’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. 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 Mexico, monetary policy is the Bank of Mexico’s year-end target for the overnight interbank rate. For the United Kingdom, monetary policy is the Bank of England’s bank rate at year-end. For the United States, monetary policy is the rounded midpoint of the Federal Reserve’s target range for the federal funds rate at year-end.
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Notes:
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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.