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. 

Oil curve points to shock, not lasting disruption

The outbreak of conflict in Iran has abruptly ended the unusual oil market dynamic highlighted in our February Market perspectives. At that time, geopolitical risk premia supported the front end of the Brent curve even as weakening supply-demand fundamentals weighed on longer-dated spreads. The conflict has brought those forces into sharper alignment.

Expectations for oil supply and demand converge anew

Note: Data reflect 30-day moving averages of Brent crude spreads.

Sources: Vanguard calculations, based on Bloomberg data, as of March 16, 2026.

It has also triggered one of the largest oil supply disruptions in decades, centered on the effective closure of the Strait of Hormuz. Roughly 20% of global seaborne oil trade—and a similar share of liquefied natural gas—flows through the strait, making the duration of disruption the key determinant of further energy price spikes. Near-term prices have spiked as supply has been curtailed.

Importantly, while short- and long-dated Brent crude spreads—key indicators of supply-demand conditions and geopolitical risk premia—have moved into closer alignment since the start of the conflict, the response further out on the curve has been comparatively muted. The Brent 36-month contract has risen only modestly since late February, compared with a much larger spike in the front-month contract. This divergence suggests that, despite the severity of the near-term shock, market participants continue to expect a relatively swift resolution rather than a long-lasting loss of supply.

That said, $100-plus Brent is no longer an extreme outcome: The front-month Brent contract traded over $100 from March 12 through March 17. As this March 11 Vanguard article notes, a protracted period of oil over $100 would weigh on growth and spur inflation in the U.S., the euro area, and Japan.

The oil shock is now feeding directly into broader macro-pricing through terms of trade-driven currency moves, higher near-term interest rates, and suddenly rising inflation expectations. As elevated oil prices persist, concerns about economic growth and tightening financial conditions are complicating monetary policy outlooks.

As events continue to unfold, oil markets will remain a critical barometer of escalation risk. For investors, the message is unchanged: Periods of geopolitical stress can drive sharp, unsettling price moves, but discipline and a long-term perspective remain essential amid heightened volatility.

United States: Investment anchors a constructive growth outlook

The U.S. economic outlook remains constructive, with growth expected to be anchored by strong business investment and healthy consumption. We expect real GDP to grow by around the mid‑2% range, driven primarily by robust AI‑related capital expenditures and resilient private domestic demand.

We view the labor market as stable, despite weakness reflected in the March 6 U.S. labor report, with concentrated health care job creation being a structural feature and unemployment expected to remain broadly steady over the year. While labor market risks increasingly reflect the potential for more rapid AI impacts rather than economic weakening, we see near-term stability as the most likely outcome.

Many of the 92,000 job losses in February, as reported by the U.S. Bureau of Labor Statistics, can be attributed to severe winter weather and strikes in the health care sector. We would expect to see further instances of monthly job loss this year given immigration- and demographic-related changes in the workforce that have lowered the breakeven rate, or the job-creation rate that would cause a change in the unemployment rate. However, we continue to anticipate a resilient labor market in 2026.

Inflation continues to decelerate. We project that core inflation will ease toward roughly 2.6% by year‑end 2026, supported by continued housing disinflation and improving productivity trends. While services inflation remains sticky due to wage firmness, the balance of inflation risks skews modestly to the downside. Trade‑related inflation pressures are more muted than previously feared, as tariff exemptions and legal constraints have limited effective tariff pass‑through.

We continue to pay attention to the oil market and events in the Middle East for their potential to push inflation higher or disrupt financial conditions.

Against this backdrop, we assess monetary policy to be near neutral, or the rate where it would neither stimulate nor restrict the economy. With growth remaining firm and inflation easing modestly, we expect the Federal Reserve to proceed cautiously, delivering a single rate cut in 2026.

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 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.