Market perspectives

Vanguard’s outlook for financial markets

Our 10-year annualized nominal return and volatility forecasts are based on the April 30, 2025, running of the Vanguard Capital Markets Model®.

A volatility whiplash cedes attention to deficits and Treasuries

In an unlikely sequence of events, markets have just navigated a dramatic round-trip: a sharp spike in volatility and a market sell-off, followed by an equally swift return to relative calm.

So where does that leave us? Two things stand out.

First, markets’ pricing of risk assets has not changed much. We have two sides of the same coin showing up in the equity and corporate bond markets. The equity market is supporting a historically high price-to-earnings multiple (21 times expected earnings for the next 12 months) on the strength of large U.S. firms’ consistent earnings growth and ability to expand margins. In the corporate bond market, all-in yield is attractive to many investors given the high risk-free rate. And historically low credit spreads are supported by healthy corporate fundamentals. When it comes to pricing risk, the tension between strong corporate fundamentals and historically rich valuations continues.

Second, two markets have not returned to their pre-April state; the yield curve for U.S. Treasuries is higher and steeper than it was, while the U.S. dollar remains weaker (down by about 4%). And this is likely for good reasons. With the fog around tariff policymaking slowly receding, attention is shifting toward the fiscal outlook, with questions arising over the sustainability of U.S. deficits. On May 16, Moody’s became the last of the three major rating agencies to strip the U.S. of its top credit rating. Markets took notice, sending the yield on the 30-year Treasury bond briefly above the psychologically important 5% level on May 19. Increased scrutiny of fiscal sustainability, along with tariffs’ impact on the economy thus far and where it settles, will likely remain a market focus in the months ahead.

United States: Tariff reprieve strengthens our 2025 outlook

Positive trade developments with China have lowered our assessment of where the United States’ effective tariff rate on its trading partners will stand at year-end, to a range just above 10%. Although elevated compared with last year, it is significantly lower than our assessment of around 20% immediately after the broad U.S. tariff announcement on April 2.

A trade truce on May 12 with China specifically, which included the lowering of U.S. tariffs on Chinese goods to 30% for 90 days, informs our revised outlooks for the U.S. economy. We now expect GDP growth of around 1.5% this year, or double our previous estimate. Although we anticipate the unemployment rate increasing from current levels, we no longer see it rising as high as 5%.

We expect the pace of inflation to increase too, though not to the levels we had envisioned pre-truce. We anticipate that goods prices will spike into the U.S. summer as tariff-induced price increases take effect. Leading indicators suggest some modest relief for shelter inflation later in the year, though potential developments with lumber tariffs present an upside risk.

The recent tariff developments should mitigate the severity of the challenges to the Federal Reserve’s dual mandate of ensuring price stability and supporting maximum sustainable employment. We continue to expect two quarter-point Fed rate cuts in the second half of the year. The Fed will have room to be patient with rate cuts if the labor market remains resilient.

Region-by-region outlook

Notes: Values are approximate. 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 2025. Core inflation is the year-over-year change in the Consumer Price Index, excluding volatile food and energy prices, as of December 2025. For Canada, monetary policy is the BoC’s year-end target for the overnight rate. For the United Kingdom, monetary policy is the Bank of England’s bank rate at year-end. For the Euro area, monetary policy is the European Central Bank’s deposit facility rate at year-end. For China, monetary policy is the People’s Bank of China’s seven-day reverse repo rate at year-end. For Japan, monetary policy is the BoJ’s year-end target for the overnight rate. For the United States, monetary policy is the upper end of the Federal Reserve’s target range for the federal funds rate at year-end.

Source: Vanguard.