Market perspectives

Vanguard’s outlook for financial markets 

Our 10-year annualized nominal return and volatility forecasts are based on the December 31, 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 December 31, 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. 

An emerging equity rotation and its drivers

Global equity markets diverged notably over the past year.

Equities outside the U.S. delivered strong gains, supported by U.S. dollar depreciation and a powerful, synchronized rebound in value stocks across countries and sectors.

U.S. equities also posted solid returns, roughly 15%, though for different reasons. Market leadership remained largely concentrated in the core AI scalers—many overlapping with the Magnificent Seven mega-cap growth stocks and the IT and communication services sectors. Their earnings growth once again exceeded market expectations and drove a substantial share of index performance. This pattern of narrow leadership has persisted for the past several years.

However, more recent market dynamics suggest an AI buildout-related transition may be emerging. Over the past three months, U.S. equity performance has increasingly reflected the tangible, near‑term implications of the accelerating AI investment cycle. Demand has strengthened for the physical inputs required for AI capital buildout—including natural resources, metals, materials, industrial machinery, and energy—which has begun translating into upward earnings revisions for these segments.

The rally in precious metals such as gold and silver has added to the momentum. It is an unusual development in an environment characterized by stable economic conditions and low recession risk, and it may also be aided by elevated geopolitical uncertainty. Combined, these developments have supported a rotation in the U.S. equity market, where value-and small-cap stocks have recently outperformed their large‑ and mega-cap peers.

Outside the U.S., leadership may also be poised to evolve. With deep‑value opportunities largely priced away after last year’s value resurgence, returns are starting to show more sensitivity to earnings growth than valuation catch-up. In this vein, as AI‑related capital buildout gains traction globally, international markets may reflect the same demand trends that are boosting industrials and materials in the U.S. Whether that would usher in a full rotation in equity market leadership will become clear only with time.

But this much is clear: AI capital buildout has already become an important global equity market force. Further, AI’s disruptive impact will likely be felt in both the economy and markets in the months to come.

United States: Capital spending anchors our growth outlook

Strong capital investment has been a key driver of U.S. growth over the past year, and we expect it to remain a principal strength in the year ahead, supporting GDP growth above 2% in 2026. A major contributor is the surge in AI-related expenditures, which we estimate will fuel nonresidential investment growth of about 7%.

Tariffs and trade policy effects have been muted by import frontloading, exemptions, and delayed price transmission. The pass-through of tariffs to prices will weigh moderately on growth and slow the pace of disinflation early in the year. We see core inflation peaking at just over 3% before moderating as the year progresses.

Labor markets have cooled sharply, with job creation slowing from over 200,000 positions per month at the end of 2024 to around 50,000 currently. But we estimate that demographic and immigration trends account for 70% of the slowdown, and we see underlying conditions remaining resilient. We expect the unemployment rate to settle around 4.2% by the end of 2026.

In a stronger growth environment and with monetary policy now in the range of neutral-rate estimates, we anticipate the Fed will proceed with greater caution and cut rates only once in 2026, early in the year. (The neutral rate is the interest rate that would neither stimulate nor restrict economic activity.)

Region-by-region outlook

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 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 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 upper end of the Federal Reserve’s target range for the federal funds rate at year-end.