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 December 31, 2024, 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. 

Notes: These probabilistic return assumptions depend on current market conditions and, as such, may change over time.

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 December 31, 2024. 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

Though it has fallen well below its pandemic-era peaks, the nominal pace of U.S. wage growth remains strong, at about 4%. Yet wage growth does not appear to be an impediment to inflation returning to the Federal Reserve’s 2% target. That’s because productivity gains have risen toward historical highs, also around 4%.

If productivity were to fall back to post-global-financial-crisis averages, Adam Schickling, a Vanguard senior economist, said wage growth would have to come down closer to 3% to remain noninflationary.

Productivity is notoriously difficult to predict. Restrictions in labor supply and trade could impede it. However, productivity is driven most by the application of technology to work. Vanguard’s global chief economist, Joe Davis, is cautiously optimistic about the potential for artifical intelligence to boost productivity growth and improve living standards, offsetting the headwind of an aging population.

We further expect:

• The Federal Reserve to cut rates twice in the second half of the year—a deferral from our previous forecast of rate cuts in the first half, reflecting the recent strength in labor and inflation reports.
• 2025 economic growth of 2.10%, reflecting assumed changes in trade and immigration policies.
• The unemployment rate to rise marginally in 2025, to the mid-4.00% range. If labor supply constraints exceed our base-case assumptions, however, unemployment may fall and both wage growth and inflation may climb.
• Inflation to remain in focus. A University of Michigan survey this month indicated that consumers expect 4.30% inflation over the next year, up a full percentage point from January. It isn’t clear whether the readings reflect a signal or noise amid policy uncertainty.

Euro area

A weak growth outlook and benign inflation likely will encourage the European Central Bank (ECB) to be relatively dovish in 2025. With Germany’s elections taking place February 23 and the potential for peace negotiations over Ukraine, uncertainty is high.

We expect:

• The ECB to cut its policy rate by 0.25 percentage point at each meeting until the July meeting, and then hold it at 1.75%. The current rate is 2.75%.
• Below-trend economic growth around 0.50% for 2025, with continued malaise in the manufacturing sector likely to weigh on final demand.
• The headline and core rates of inflation to both end 2025 below 2.00%.
• The unemployment rate to rise toward 7.00% by the end of 2025. It stood at 6.30% in December.

United Kingdom

Recent economic conditions in the United Kingdom have shown signs of stagflation, with the economy experiencing minimal growth and rising inflation.

We expect:

• Quarterly interest rate cuts by the Bank of England that would leave the bank rate at 3.75% at year-end, down from 4.50% today.
• 2025 economic growth of 0.70%, down from our previous forecast of 1.4%, reflecting in part a deterioration in forward-looking data, particularly on the labor market.
• Headline inflation to end 2025 at 2.50% and core inflation, which excludes volatile food, energy, alcohol, and tobacco prices, to end the year at 2.70%, both on a year-over-year basis. Both forecasts are 0.3 percentage point higher than our previous estimates.
• The unemployment rate to rise to 4.70% by year-end, up from 4.40% in the October-through-December 2024 period.

China

Investor sentiment in China is improving, bolstered by the emergence of AI start-up DeepSeek and a 24% rise in the Shanghai Composite Index from a September 2024 low. President Xi Jinping's meeting with prominent entrepreneurs on February 17 underscores the growing importance of the private sector.

We expect:

• Increased fiscal stimulus, including a one-off overshoot of the debt ceiling to address local government debt and excess housing supply. Monetary easing will support fiscal expansion.
• Near-term momentum in economic growth, as policy support takes effect. Real (inflation-adjusted) growth likely will slow to about 4.50% this year due to trade tariffs.
• The rate of core inflation to be about 1.50% this year, thanks mainly to currency depreciation in the face of higher tariffs. Otherwise, deflationary pressures remain. Producer prices were down 2.30% year over year in January, a 28th consecutive month of decline.
• The unemployment rate to remain this year around its current (5.10% in December) level. Structural mismatches in labor supply and demand, especially among younger workers, may persist.

Emerging markets

We expect the monetary policy easing cycle to broaden, albeit with rates remaining in restrictive territory as a strong U.S. dollar threatens to stoke emerging markets inflation. Trade developments are likely to be in focus throughout 2025.

In Mexico, we expect:

• A central bank easing cycle that began in March 2024, when the policy rate was 11.25%, to continue. We forecast that the overnight interbank rate will end 2025 in a range of 8%–8.25%, down from 9.5% today.
• The core rate of inflation, which excludes volatile food and energy prices, to fall to 3.25%–3.5% in 2025, above the midpoint of Banxico’s 2%–4% target range.
• Economic growth of 1.25%–1.75% this year, with potential for further slowing if trade tensions escalate.