Market perspectives
Vanguard Perspective
|July 29, 2026
Market perspectives
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The views below are those of the global economics and markets team of Vanguard Investment Strategy Group as of July 22, 2026.
AI continues to support earnings growth, but investors are increasingly focused on which companies can convert record levels of AI investment into sustainable returns.
The U.S. economy remains resilient, but above-target inflation and a softer labor market are likely to keep the Federal Reserve on hold through 2026.
Markets forecasts
Vanguard’s outlook for financial markets
Our 10-year annualized nominal return and volatility forecasts are based on the June 30, 2026, 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 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
Rotation away from large-cap tech accelerates
The “Magnificent Seven,” the large-cap tech companies that have been the darlings of the U.S. stock market for so long, underperformed in the first half of 2026. While the Standard & Poor’s 500 Index returned a healthy 9%, the Mag 7 fell 1%, with Microsoft and Meta being notable laggards. This underperformance intensified late in the period as the Mag 7 dropped almost 9% in June, its worst month in more than a year.
So what is going on? The dominant narrative is that investors are increasingly questioning whether the large investments committed by the AI “hyperscalers”—Alphabet, Amazon, Meta, Microsoft, and Oracle—will deliver sufficient returns amid elevated expectations and intensifying competition. This is something we flagged in the Vanguard Economic and Market Outlook for 2026 .
But there is more going on behind the scenes. Rising costs for memory chips and electrical equipment are squeezing profit margins at large-cap tech companies. (Apple and Microsoft recently announced price increases for some popular products.) Two other factors also likely weighed on returns: Investors had heavy allocations to richly priced large-cap tech stocks, and the Federal Reserve pivoted to a hawkish stance, affecting growth stocks disproportionately.
Instead, investors are rotating away from large-cap tech and into companies that produce the physical components and infrastructure that are in high demand as hyperscalers ramp up their investment ambitions. These include suppliers of high-bandwidth memory (such as SK Hynix and Micron) as well as providers of lithography machines (such as ASML), electrical infrastructure (such as Schneider Electric), and servers (such as Cisco and Dell).
In our midyear capital market outlook, we referred to this broader set of global companies as the “AI complex,” and highlighted material upward revisions to earnings expectations for this group in recent months. This AI complex, excluding hyperscalers, returned 100% in the first half of 2026, a significant outperformance relative to both the Mag 7 and broader S&P 500.1 We prefer this measure to the narrower (and price-weighted) Philadelphia Semiconductor Index, which is also shown in the figure for comparison.
The Magnificent Seven underperformed in the first half of 2026
Sources: Vanguard calculations, based on data from Bloomberg as of June 30, 2026.
Notes: The Mag 7 consists of Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla. The “AI complex” ex-hyperscalers category refers to a group of roughly 45 companies globally that are driving the physically intensive buildout of AI infrastructure, including companies focused on semiconductors, high-bandwidth memory, data centers, networking, and energy infrastructure. This group excludes the hyperscalers Alphabet, Amazon, Meta, Microsoft, and Oracle. Past performance is not a guarantee of future results. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.
We expect the AI complex to remain volatile, given the sharp recent run-up. In the week ended July 17, the Philadelphia Semiconductor Index and Asian technology stocks came under significant pressure amid concerns that the trade may have gotten ahead of itself, and on news of the launch of a Chinese AI model, called Moonshot, that could rival top U.S. systems.
Looking ahead, we remain constructive on the shorter-term outlook for equities as the AI investment cycle deepens. A decrease in oil prices from recent highs amid conflict in the Middle East should also be supportive for risk sentiment.
Our medium-term outlook is more cautious. The next phase of the AI story is more about whether current investment translates into productivity gains for the broader global economy. History tells us that over time, the benefits of general-purpose technologies spread throughout the economy from the sector that drove the initial innovation. This tendency, coupled with already stretched valuations in U.S. growth stocks, is why we continue to prefer U.S. value stocks and developed markets equities outside of the U.S. over longer time horizons.
Economic forecasts
United States: Policy on hold as inflation lingers and hiring slows
Price pressures have reemerged as a factor in the outlook and will be a leading determinant of the policy trajectory. The recent significant and rapid easing of energy prices is a welcome factor that will mitigate growth headwinds and concerns of significant pass-through into prices this year.
June’s softer labor market data aligned with our expectations for a summer slowdown in hiring activity, which will bias the unemployment rate modestly upward over the next several months. However, we continue to view the labor market as fundamentally healthy. We expect the unemployment rate to stabilize in the mid-4% range and be consistent with full employment through 2027.
In this environment, we anticipate that the Federal Reserve will be constrained. Inflation remains uncomfortably above target, and while price pressures should ease and the labor market should soften modestly over the coming months, we view policy on hold through 2026 as the most likely outcome.
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% | 4.10% | 3.80% | 6.50% | 6.50% |
| United Kingdom | 1.10% | 1.20% | 5.30% | 5.30% | 2.80% | 2.60% | 4.25% | 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.
1 Local currency price return, weighted by market capitalization in U.S. dollars.
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.
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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.
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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.