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 March 31, 2025, running of the Vanguard Capital Markets Model® (VCMM).

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. 

The probabilistic return assumptions depend on market conditions and change with each running over time. Forecast changes relative to the December 31, 2024, running of the VCMM are attributable both to market movements and enhancements to our model itself.

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 March 31, 2025. 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 anticipated impact of tariffs and related policy uncertainty led us recently to lower our forecast of economic growth and increase our forecasts for unemployment and inflation.

We now expect:

• Full-year 2025 economic growth of less than 1%, down by a percentage point. Real-time signals point to a material slowdown in GDP growth in the first quarter.
• Inflation of nearly 4% this year.
• Two interest rate cuts (each 0.25 percentage point) by the Federal Reserve in the second half of 2025, leaving its target for short-term rates at 3.75%–4%. That’s 0.25 to 0.5 percentage point higher than most market participants are pricing in for year-end.
• A year-end unemployment rate of about 5%, up from our prior forecast of 4.5%. In March, unemployment stood at 4.2%.

Euro area

The region faces economic challenges due to elevated tariffs and related uncertainty, which are likely to counteract the gains from German fiscal stimulus.

We expect:

• Economic growth in 2025 of less than 1% and growth next year of about 1%. We anticipate that the effective tariff rate on euro area goods will rise to around 15% this year, which would pull down economic growth.
• Core inflation, which excludes food, energy, alcohol, and tobacco prices due to their volatility, to end 2025 just below 2%. Such prices were up 2.4%, on a year-over-year basis, in March.
• The European Central Bank to cut policy rates twice this year, to a year-end rate of 1.75%. Its current deposit facility rate is 2.25%.
• An unemployment rate of about 6.5% at year-end, up from the current record low of 6.1% in February.

United Kingdom

The economy is facing challenging domestic forces, with core inflation falling more slowly than expected and the labor market deteriorating.

We expect:

• Economic growth in 2025 of about 0.5%, modestly lower than our prior forecast. Our outlook had already reflected a deterioration in forward-looking data, particularly for the labor market. Tax hikes, still-restrictive monetary policy, and a softening external environment are all weighing on demand.
• Core inflation to fall to around the central bank's 2% target in 2026. Core prices, which exclude food, energy, alcohol, and tobacco due to the volatility of their prices, were 3.4% higher in March than one year earlier.
• The Bank of England to cut the bank rate quarterly, leaving it at 3.75% at year-end. It is 4.5% today.
• The unemployment rate to end the year around 4.8%, up from 4.4% for the December-through-February period.

China

China's economy had a strong first quarter, but the global trade environment suggests challenges ahead.

We expect:

• Full-year 2025 economic growth just above 4%, with risks to the downside. We previously forecast 4.5% growth. We foresee the Politburo meeting this month as an opportunity for the announcement of supportive policy measures. But we don’t expect such measures to fully offset U.S. tariffs.
• Full-year core inflation of about 0.5%, and headline inflation to be even lower. Although food represents about 30% of China’s Consumer Price Index and the price of imported agricultural products could rise, that would likely be offset by energy and commodities prices pressured lower amid slowing global growth.
• On the monetary policy front, a 0.3 percentage point cut to the central bank’s seven-day reverse repo rate and 0.5 point of cuts to banks’ reserve requirement ratios.

Emerging markets

We recently lowered our 2025 GDP growth forecast for Mexico from a range of 1.25%–1.75% to below 1%, owing to headwinds from uncertainty related to trade developments. The economy succumbed to the effects of restrictive monetary policy in the fourth quarter of 2024, contracting by 0.6% compared with the third quarter.

The Bank of Mexico (Banxico) cut its target for the overnight interbank rate by 50 basis points, effective March 28, to 9%. We expect an easing cycle that began in March 2024, when the policy rate was 11.25%, to continue through 2025. Our core inflation forecast for Mexico is little changed as we await clarity around the potential for the nation to impose tariffs on U.S. goods.

As inflation soars in Brazil, the central bank is fighting back by increasing interest rates. Brazil’s central bank raised its policy Selic rate by a full percentage point for a third straight meeting on March 19. The rate now stands at 14.25%. The bank said in its statement that it anticipated “an adjustment of lower magnitude in the next meeting, if the scenario evolves as expected.” Recent conditions have been marked by resilient economic activity, labor market pressures, and a deanchoring of inflation expectations.