Market perspectives
Vanguard Perspective
|August 25, 2026
Market perspectives
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Market Perspectives August Summary
We summarized Market Perspectives and packaged it in a one-pager made to share with clients.
The views below are those of the global economics and markets team of Vanguard Investment Strategy Group as of August 19, 2026.
The growing presence of AI-related companies in value indexes highlights how value portfolios can adapt as market leadership changes.
The U.S. economy remains resilient, but persistent inflation pressures are likely to keep the Federal Reserve on hold, with risks increasingly tilted toward additional tightening.
Markets forecasts
Vanguard’s outlook for financial markets
Our annualized nominal return and volatility forecasts are based on the June 30, 2026, running of the Vanguard Capital Markets Model® (VCMM).
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 June 30, 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
How AI is becoming a value-stock story
Value stocks have outperformed both growth stocks and the broad equity market this year, primarily because their valuations have expanded. But what’s behind that expansion may come as a surprise.
Rising earnings forecasts have fueled most of the valuation expansion since the start of the year. The chart below, based on the index behind our largest passive value fund, illustrates the potential surprise: More than three-quarters of the increase in consensus earnings growth expectations stems from index turnover, not from organic increases in earnings expectations within existing index holdings. In other words, the rise has come more from companies with high expected earnings growth entering the index rather than higher analyst estimates for companies already in the index.
The companies driving the shift tell a compelling story about how value exposure adapts to market dynamics. Value exposure to the AI complex has increased by 5 percentage points since the start of the year. The most substantial increases have occurred in the semiconductor space, where exposure nearly doubled, from 4.4% to 8.3%. This compositional shift took place in March and April, coinciding with a surge in earnings expectations. The timing suggests that as certain technology companies met value criteria—whether through relative valuation, profitability metrics, or other factors—they entered the index and immediately contributed to elevated earnings growth projections.
Earnings optimism is driving value index returns
Sources: Vanguard calculations based on data from Bloomberg, as of July 31, 2026.
Notes: The chart is based on the Morningstar U.S. Large Cap Value Index. It decomposes the year-over-year change in our preferred valuation measure (price/trailing 3-year average earnings ratio) into its component parts. Multiplying current earnings/trailing 3-year average earnings yields the current P/E ratio, which can be further decomposed into expected earnings growth from consensus estimates and a residual component representing discount rate factors and earnings expectations beyond consensus estimates. To improve readability and more easily compare contributions from different drivers of return, we display valuation changes using year-over-year change in logarithms rather than percentage change.
The shift underscores an important broader principle about value investing: Value portfolios are not static. While many investors associate value stocks with traditional sectors, such as financials, energy, and industrials, the sector composition of value indexes evolves over time as different companies and industries meet the criteria for inclusion.
As investors navigate uncertainty around AI's economic impact, recent market dynamics provide a useful example of this evolution in action. The index that our largest passive value fund seeks to track has benefited from increased exposure to AI-related companies, particularly in semiconductors, as several technology firms have become valued attractively enough to meet the index's inclusion requirements. In other words, AI is no longer solely a growth-stock story. Some of the companies helping drive innovation are increasingly becoming part of the value universe as well.
That said, we believe the most durable long-term investment opportunities in value may extend beyond the companies and sectors building AI infrastructure. Over time, some of the biggest beneficiaries could be businesses across a wide range of industries that successfully use AI to improve productivity, lower costs, enhance customer experiences, and strengthen profitability. The current composition of value indexes reflects where opportunities exist today, but tomorrow's leaders may look very different as AI adoption spreads throughout the broader economy.
Value portfolios naturally adapt as market leadership evolves, providing exposure to companies with attractive valuations and improving fundamentals. As AI moves from a technology theme to a broader economic force, value strategies may be well positioned to capture opportunities that emerge across sectors, sometimes in ways investors may not expect.
Economic forecasts
United States: Steady growth, stable labor, sticky inflation
Growth continues to demonstrate resilience, with activity tracking at a pace consistent with an economy expanding above 2%. Business investment remains a notable source of strength, exceeding already robust expectations as firms continue to deploy capital in response to AI demand. We expect this capex cycle to remain an important contributor to growth through 2027. Consumer spending is also evolving broadly in line with expectations, supported by tax policy tailwinds and the continued benefits of elevated household wealth. Softer real income growth presents a potential headwind to consumption during the second half of the year.
The labor market remains fundamentally stable, with a broad range of indicators suggesting conditions remain close to neutral and consistent with overall health. While we continue to anticipate some moderation in payroll growth and a modest increase in unemployment during the summer months, we do not view these developments as signaling material deterioration.
Inflation continues to be distorted by measurement issues and temporary factors. However, underlying price pressures appear to be stuck in a range just below 3%. As a result, we expect the Federal Reserve to remain on hold, with risks increasingly skewed toward additional tightening should inflation fail to moderate or labor market conditions remain firm.
Region-by-region outlook
| Country/region | GDP growth | Unemployment rate | Core inflation | Monetary policy | ||||
|---|---|---|---|---|---|---|---|---|
| 2026 | 2027 | 2026 | 2027 | 2026 | 2027 | 2026 | 2027 | |
| Canada | 1.50% | 1.60% | 6.50% | 6.40% | 2.20% | 2.20% | 2.25% | 2.25% |
| China | 4.70% | 4.80% | 5.10% | 5.00% | 1.20% | 1.30% | 1.40% | 1.40% |
| Euro area | 0.80% | 1.30% | 6.40% | 6.30% | 2.20% | 2.30% | 2.50% | 2.00% |
| Japan | 0.80% | 1.20% | 2.40% | 2.40% | 2.10% | 2.20% | 1.25% | 1.75% |
| Mexico | 1.30% | 2.00% | 3.00% | 3.50% | 3.90% | 3.50% | 6.50% | 6.50% |
| United Kingdom | 1.10% | 1.20% | 5.30% | 5.30% | 2.60% | 2.50% | 3.75% | 3.75% |
| United States | 2.30% | 3.00% | 4.60% | 4.40% | 3.00% | 2.50% | 3.60% | 3.60% |
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 for each year. For Canada, core inflation is the year-over-year change in the Consumer Price Index (CPI), excluding volatile food and energy prices, as of December for each year. Monetary policy is the Bank of Canada’s year-end target for the overnight rate. For China, core inflation is the year-over-year change in the CPI, excluding volatile food and energy prices, as of December for each year. Monetary policy is the People’s Bank of China’s seven-day reverse repo rate at year-end. For the Euro area, core inflation is the year-over-year change in the Harmonized Indexes of Consumer Prices, excluding volatile energy, food, alcohol, and tobacco prices, based on the fourth-quarter average for each year. Monetary policy is the European Central Bank’s deposit facility rate at year-end. For Japan, core inflation is the year-over-year change in the CPI, excluding volatile fresh food prices, as of December for each year. Monetary policy is the Bank of Japan’s year-end target for the overnight rate. For Mexico, core inflation is the year-over-year change in the CPI, excluding volatile food and energy prices, as of December for each year. Monetary policy is the Bank of Mexico’s year-end target for the overnight interbank rate. For the United Kingdom, core inflation is the year-over-year change in the CPI, excluding volatile food, energy, alcohol, and tobacco prices, based on the fourth-quarter average for each year. Monetary policy is the Bank of England’s bank rate at year-end. For the United States, core inflation is the year-over-year percentage change in the Personal Consumption Expenditures price index, excluding volatile food and energy prices, as of December for each year. 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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Market perspectives
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Notes:
All investing is subject to risk, including possible loss of the money you invest. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. Diversification does not ensure a profit or protect against a loss.
Prices of mid- and small-cap stocks often fluctuate more than those of large-company stocks.
Investments in bonds are subject to interest rate, credit, and inflation risk.
Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. These risks are especially high in emerging markets.
Funds that concentrate on a relatively narrow market sector face the risk of higher share-price volatility.
U.S. government backing of Treasury or agency securities applies only to the underlying securities and does not prevent share-price fluctuations. Unlike stocks and bonds, U.S. Treasury bills are guaranteed as to the timely payment of principal and interest.
Municipal bond fund distributions, including any market discount recognized by the Fund's investments, may be taxable as ordinary income or capital gains. A majority of the income dividends that you receive from the Fund are expected to be exempt from federal income taxes. However, a portion of the Fund's distributions may be subject to federal, state, or local income taxes or the federal alternative minimum tax. You should consult your own tax advisor with respect to any particular U.S. or non-U.S. tax consequences of your investment in the Fund.
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.