Market perspectives

Vanguard’s outlook for financial markets 

Our 10-year annualized nominal return and volatility forecasts are based on the December 31, 2025, 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 December 31, 2025. 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: 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. These return assumptions depend on current market conditions and, as such, may change over time. We make our updated forecasts available at least quarterly. 

Higher geopolitical risk premia support commodities 

Commodities delivered strong headline returns in 2025. Yet, beneath the surface, this rally was quite uneven—precious metals rose by roughly 80%, while the remainder of the Bloomberg Commodity Index underperformed cash by more than 3%.

Less than two months into the new year, the commodities rally may be broadening beyond precious metals to energy and non-precious metals. It’s early, but given that commodities are known for supercycles—those that can last over a decade, driven by long-term trends—we’re considering what may be behind this broadening. The oil futures curve offers clues.

The accompanying chart shows two futures spreads over the last two decades. One line measures the price difference, or spread, between the near‑expiration Brent crude oil futures contract and the contract one year out. When the spread is positive, with near-term prices exceeding further-out prices, it typically signals near‑term excess demand or equivalent tightness in supply. A second line compares futures prices further out—the one‑year contract versus the three‑year—and captures longer‑term supply‑demand imbalances.

Expectations for oil supply and demand diverge over the short and long term

Note: Data reflect 30-day moving averages of Brent crude spreads.

Sources: Vanguard calculations, based on Bloomberg data, as of February 9, 2026.

For much of the past two decades, these short‑ and long‑term spreads have moved together, reflecting broadly consistent market views across time horizons. A notable exception occurred during 2006–2007, toward the end of the last commodity supercycle, when strong long‑term demand expectations—driven largely by China—supported longer‑dated prices even as near‑term fundamentals appeared less tight.

Another unusual exception—a reversal of the 2006–2007 pattern—accompanies today’s broadening of the rally: Shorter‑term spreads indicate tight market conditions here and now, while longer‑term spreads suggest a lack of concerns about supply beyond a year out.

So, what’s behind the near-term tightness? Some of it may stem from a desire to build stockpiles, hedging against the potential for supply-chain disruptions amid elevated geopolitical risks. At a deeper level, the evolving nature of globalization toward more fragmentation may be at play. Nations’ efforts to prioritize resource security, reshore supply chains, and reduce strategic dependencies have the potential to reshape commodities markets. The resulting heightened competition suggests the possibility of higher risk premia being priced into commodities, likely pushing up prices in the near term even as longer‑term supply expectations remain comparatively well anchored.

Whether this condition lasts bears watching. If it remains a force over the coming years, commodities markets—particularly in critical minerals, gold, and energy—could command more persistent risk premia than in prior decades.

United States: Less urgency, more Federal Reserve caution

The January Federal Open Market Committee meeting provided further evidence that monetary policy will proceed more cautiously in 2026. Our baseline expectation is for firm growth ahead, and with the federal funds rate now aligned with a range of neutral estimates, we expect the Federal Reserve to become more cautious about easing. (The neutral rate is the interest rate that would neither stimulate nor restrict economic activity).

U.S. economic momentum continues to be anchored by robust capital outlays, which have played a central role in driving growth over the past year. We expect business investment to remain a major source of strength in 2026. A significant part of this support comes from the rapid expansion of AI‑related spending, which we estimate to still be in the early stages.

Recent data have provided positive signs of continued disinflation. Some modest tariff-related impacts will still likely filter through early this year, and we expect core inflation to crest slightly above 3% before easing later in the year. The recent Supreme Court ruling means we are in a fluid state with regards to tariffs. Regardless, any economic headwinds from tariffs in 2026 will likely be offset by tailwinds from the One Big Beautiful Bill Act, eased regulation, AI-driven capital investment, and lower policy interest rates than in recent years.

Job creation has cooled considerably over the past year. Even so, we believe the underlying labor backdrop remains stable. We assess that demographic dynamics and immigration flows explain about 70% of a recent hiring slowdown, rather than a deterioration in labor demand. We see the unemployment rate firming toward 4.2% by the end of 2026.

Region-by-region outlook

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 2026. Core inflation is the year-over-year change in the Consumer Price Index, excluding volatile food and energy prices, as of December 2026. For Canada, monetary policy is the Bank of Canada’s year-end target for the overnight rate. For China, monetary policy is the People’s Bank of China’s seven-day reverse repo rate at year-end. For the Euro area, monetary policy is the European Central Bank’s deposit facility rate at year-end. For Japan, monetary policy is the Bank of Japan’s year-end target for the overnight rate. For Mexico, monetary policy is the Bank of Mexico’s year-end target for the overnight interbank rate. For the United Kingdom, monetary policy is the Bank of England’s bank rate at year-end. For the United States, monetary policy is the rounded midpoint of the Federal Reserve’s target range for the federal funds rate at year-end.