| Vanguard Perspective

Market perspectives

Recent events in the U.S. and European banking sectors have not altered our macroeconomic views. The Federal Reserve still has work to do to bring down inflation—a task that was always going to be a challenge, likely to entail higher unemployment and tighter credit and financial conditions. Deterioration in financial conditions has long been part of our expectation for a modest recession later this year.

The views below are those of the global economics and markets team of Vanguard Investment Strategy Group as of March 23, 2023.

Projected returns

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, 2022, running of the Vanguard Capital Markets Model® (VCMM). Equity returns reflect a 2-point range around the 50th percentile of the distribution of probable outcomes. Fixed income returns reflect a 1-point range around the 50th percentile. More extreme returns are possible.


Return projection

Median volatility

U.S. equities



U.S. value



U.S. growth



U.S. large-cap



U.S. small-cap



U.S. real estate investment trusts



Global equities ex-U.S. (unhedged)



Global ex-U.S. developed markets equities (unhedged)



Emerging markets equities (unhedged)




Fixed income

Return projection

Median volatility

U.S. aggregate bonds



U.S. Treasury bonds



U.S. credit bonds



U.S. high-yield corporate bonds



U.S. Treasury Inflation- Protected Securities



U.S. cash



Global bonds ex-U.S. (hedged)



Emerging markets sovereign bonds



U.S. inflation




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, 2022. Results from the model may vary with each use and over time. For more information, see the Notes section.


Region-by-region outlook

United States

United States

In its March 22 policy announcement, the Federal Reserve endorsed the health of the U.S. banking system but cautioned that recent developments were likely to result in tighter credit conditions and to weigh on economic activity. The Fed raised its target for short-term interest rates by 25 basis points (0.25 percentage point) to a range of 4.75%–5%.

  • The core Consumer Price Index, which excludes food and energy prices, rose by 0.5% in February, its fastest pace in five months, and by 5.5% compared with a year earlier. The core Personal Consumption Expenditures (PCE) index, the Fed’s preferred inflation measure, rose by 4.7% in January compared with a year earlier. We expect core PCE to end 2023 at about 3%, still higher than the Fed’s 2% inflation target.
  • Aspects of the February jobs report suggest a softening in labor conditions. The size of the labor force increased by more than the number of jobs created, and wage growth lagged expectations. We expect a year-end unemployment rate of 4.5%–5%, up from 3.6%, which would mean monthly job losses averaging 250,000 in the second half of 2023.
  • A recession in the second half of 2023 remains our base case, but the odds of a later downturn have risen. Core aspects of the economy, such as consumption and the labor market, continue to show above-trend activity.
  • We have increased our 2023 U.S. growth outlook to 0.75%, higher than the 0.25% we set forth in the Vanguard economic and market outlook for 2023: Beating back inflation.


Euro area

When the European Central Bank (ECB) raised its key interest rate by 50 basis points, to a 15-year high of 3.0%, on March 16, it said “inflation is projected to remain too high for too long.” It emphasized that, because of recent stresses in the banking sector, it “stands ready to respond as necessary to preserve price stability and financial stability in the euro area.”

  • We foresee the ECB raising its key rate to a range of 3.75% to 4%, up from our previous view of 3.5%, though risks are skewed to the downside in the potential form of a slower-than-expected pace of hikes or a lower terminal rate. We don’t expect rate cuts before 2024.
  • Core inflation (which excludes volatile food and energy prices) was 5.6% in February compared with a year earlier, a third straight month of acceleration. We expect core inflation to average 4.5% in 2023—50 basis points higher than our previous expectation—and to end the year around 3.3% as the effects of tighter monetary policy take hold.
  • Buoyed by the post-pandemic reopening of China’s economy and fewer supply-chain disruptions, we now foresee euro area GDP growing by 0.5% in 2023, up from our most recent view of no growth.
  • We continue to foresee a mild recession in the euro area in 2023, though we now expect it to occur in the second half of the year. The region faces a slowdown from the lagged effects of tighter monetary policy.

United Kingdom

The Bank of England (BOE) raised the interest rate it pays on commercial bank deposits by 25 basis points to 4.25% on March 23. The bank noted in its statement that “global growth is expected to be stronger than projected in the February Monetary Policy Report, and core consumer price inflation in advanced economies has remained elevated.”

  • Core inflation, which excludes volatile food and energy prices, climbed to 6.2% in February, higher than 5.8% in January but below a 6.5% October 2022 peak. We expect core inflation to fall below 4% by the end of 2023 as the effect of higher interest rates and the benefits of lower energy prices work through the economy.
  • The slow disinflation process underscores our belief that the BOE will raise the bank rate to a high of 4.5% and that rate cuts will occur no earlier than 2024. Greater global financial stability concerns increase downside risks to our view.
  • Forward-looking surveys suggest weakness in both wages and the broader labor market in coming quarters. We continue to expect recession in 2023, with three quarters of contraction and full-year GDP falling by about 1%, though recently stronger high-frequency data skew risks to the upside. We foresee growth of about 0.6% in 2024.



A surprise move by the People’s Bank of China (PBoC) will inject liquidity into the banking system but doesn’t affect our outlook. The bank announced on March 17 that, effective March 27, it was cutting its reserve requirement ratio (RRR) by 25 basis points for large and medium-size banks with RRRs above 5%. We estimate the move will lower the banking system’s effective RRR to 7.6% and release about CNY 500 billion ($73 billion) of liquidity, resulting in modest bank-financing cost reductions.

  • The PBoC move came even amid signs of economic improvement and as China has provided liquidity and credit support through other vehicles. We regard it as a strong signal to boost domestic confidence and as acknowledgment of the challenge posed by globally tightening financial conditions.
  • Recent data depict economic strength after the country’s post-COVID reopening. Retail sales rebounded in the first two months of the year, having declined in the three previous months, and the Index of Services Production rose 5.5% year-on-year. We anticipate that pent-up demand will be a key growth driver this year.
  • China’s manufacturing sector also strengthened in February, according to purchasing managers index data. Large enterprises had the highest reading, but small and medium-size enterprises had the greatest month-on-month gains, suggesting broad momentum.
  • Recent events in the U.S. and European banking sectors may have intensified Chinese policymakers’ concerns of a deeper-than-expected global downturn, which would exert downward pressure on China’s growth through financial or trade channels. Our base case for China’s 2023 GDP growth remains unchanged at an above-consensus 5.3%, a figure consistent with a mild global downturn.

Emerging markets

Emerging markets

Stronger-than-expected current data and leading indicators in both developed and emerging markets have led us to increase our forecast of aggregate 2023 emerging markets GDP growth from about 3% to about 3.25%. Purchasing managers’ indexes and consumer spending data suggest that, like some developed markets, economies in emerging markets are holding up better than expected.

  • In Mexico, as in the United States, disinflation remains a gradual process. Core inflation inched down in February but remained stubborn at 8.29% compared with a year earlier. Headline inflation, however, slowed to 7.62% year-on-year in February, its slowest pace of increase since March 2022.
  • The Bank of Mexico on February 9 cited the “slower-than-foreseen disinflationary process” in raising the target for its overnight interbank rate by 50 basis points to 11%. It said the balance of risks for inflation’s trajectory remained biased to the upside. The bank is scheduled to make its next policy announcement on March 30.
  • Banco Central do Brasil left its Selic rate unchanged at 13.75% for a fifth straight meeting on March 22.


  • All investing is subject to risk, including the possible loss of the money you invest.
  • Investments in bonds are subject to interest rate, credit, and inflation risk.
  • Investments in stocks and 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.
  • IMPORTANT: The projections and 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. 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.