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

Uncertainty around tariffs, immigration, and other policy is likely to weigh on the economy in 2025. Real-time signals point to a material slowing of growth in the first quarter. In its March 18 GDP Now estimate, the Federal Reserve Bank of Atlanta anticipated a first-quarter economic contraction.

Increased policy uncertainty has prompted us to downgrade our 2025 U.S. growth forecast and to raise our inflation forecast. We now expect:

• Full-year 2025 economic growth of 1.7%, down from 2.1%.
• The core rate of inflation, which excludes food and energy prices due to their volatility, to register about 2.7% this year, up from our previous forecast of 2.5%, based on the Fed’s preferred inflation measure, the Personal Consumption Expenditures price index.
• A considerably softer labor market report for March than we’ve become accustomed to. The report will reflect recently announced government layoffs, and we expect little employment growth in private-sector industries that are sensitive to government spending. Tariff uncertainty likely has curbed hiring in construction and manufacturing.
• The Federal Reserve to cut its target for short-term interest rates twice in the second half of the year, to a range of 3.75%–4% at year-end. The current target is 4.25%–4.5%.

Euro area

The government of Germany, home to the euro area’s biggest economy, recently approved its largest fiscal spending increase in more than a generation. Headlined by a €500 billion infrastructure investment fund, the fiscal package could boost euro area economic growth and inflation and lead to a higher European Central Bank (ECB) policy interest rate.

In addition to Germany’s fiscal package, which includes an exemption from the nation’s rule against spending more than 1% of GDP on defense, increases in defense spending across Europe and the prospect of a ceasefire in Ukraine lead us to increase our forecasts for euro area economic growth, inflation, and the ECB policy rate.

Financing for the plan may significantly increase the supply of government-backed debt. The plan unlocks billions of euros in spending that could help kick-start Germany’s flagging economy, which has been contracting for more than two years.

We now expect:

• Economic growth in 2025 of 1%, up from our previous forecast of 0.5%, and a 1.6% expansion in output next year, up from our previous forecast of 0.8%. Significant tariffs on U.S. imports of European Union goods for an extended period could largely offset the gains from expansionary fiscal policy in 2025 and 2026.
• The headline and core rates of inflation to end 2025 below 2%, though we have lifted our estimate of core inflation for 2026 by 0.2 percentage point to 2.1%.
• One final interest rate cut by the European Central Bank, which would bring its deposit facility rate to 2.25%. We previously forecast a terminal rate of 1.75%
• The unemployment rate to rise only modestly, instead of the previously forecasted gradual rise to near 7% in 2025, from the current record low of 6.2%

United Kingdom

The economy of the United Kingdom recently has been characterized by sluggish growth and moderating but elevated price and wage pressures. On March 20, the central bank’s policymakers maintained their 4.5% target interest rate, noting a gradual approach to further monetary policy adjustments.

We expect:

• Economic growth this year of 0.7%, down from our previous forecast of 1.4%, reflecting base effects from late 2024 and deteriorating forward-looking data.
• The headline rate of inflation to rise toward 3.5% in the near term due to higher energy prices but to fall to about 2.5% by year-end. The core inflation rate is likely to fall to about 2.7% by year-end.
• The unemployment rate to end the year around 4.7%, up from 4.4% for the November-through-January period, reflecting recent signs of labor market softening.
• The Bank of England to reduce its policy interest rate from 4.5% to 3.75% by year-end.

China

China's economy has appeared robust in the first quarter of 2025, but underlying headwinds suggest slower growth for the rest of the year.

We expect:

• Full-year economic growth of about 4.5%, a bit less than the growth target of “about 5%” set for the third consecutive year by the National People’s Congress. An April Politburo meeting will be a key indicator of whether policy shifts to boost consumption.
• A core rate of inflation of about 1.5% in 2025. Supply-centric policies have reinforced a negative feedback loop between weak demand and low prices.
• The unemployment rate—5.4% in January–February—to finish 2025 around 5%.
• Monetary policy adjustments aimed at boosting growth—specifically, a 0.3 percentage point cut to the seven-day reverse repurchase rate and 0.5 percentage point of cuts to banks' reserve requirement ratios.  

Emerging markets

Recent economic conditions in emerging markets have been mixed. Mexico's economy contracted by 0.6% in the fourth quarter of 2024, and inflation remains a concern, while Brazil has seen a significant rise in inflation, leading the central bank to raise its policy interest rate to 14.25% to combat rising prices.

In Mexico, we expect:

• That economic growth could slow below our 1.25%–1.75% baseline for 2025 if significant tariffs are implemented and sustained.
• The core rate of inflation to fall to 3.25%–3.5% in 2025, above the midpoint of Banxico’s 2%–4% target range. It registered 3.65% year over year In February.
• The easing cycle at the Bank of Mexico (Banxico) to continue, with its policy rate ending 2025 in a range of 8%–8.25%. It is 9.5% today.