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Vanguard's 2026 Economic and Market Outlook

On December 10, 2025, Vanguard released its anticipated annual report detailing the economic and market projections for 2026. Titled "AI Exuberance: Economic Upside, Stock Market Downside," this year's outlook presents investors with a nuanced perspective on the evolving global economic landscape.

In essence, the report positions artificial intelligence (AI) as a driving factor during turbulent economic times. Vanguard's global team of economists emphasizes that despite facing significant challenges such as rising tariffs and a stagnant labor market, the markets show signs of resilience. Positive growth in corporate earnings, largely propelled by AI investments, fuels this optimism.

Joe Davis, Vanguard’s Global Chief Economist, forecasts a 60% probability that the U.S. economy will achieve a real GDP growth of 3% in the coming years. However, he also warns that this growth is not expected to manifest in 2026, thereby prompting a cautious yet optimistic investment outlook.

U.S. Economic Projections for 2026

For the year ahead, Vanguard anticipates a more modest GDP growth rate of 2.25%, with implications based on AI-driven investments and a supportive fiscal environment from the One Big Beautiful Bill Act. Although the initial half of the year may reflect the ongoing impacts of stagflation, expected improvements in the labor market may begin to appear towards the end of 2026, stabilizing the unemployment rate around 4.2%.

Additionally, inflation is likely to persist above 2% throughout 2026, which implies that the Federal Reserve may have limited capacity to lower interest rates beyond the neutral rate of 3.5%. This forecast diverges from the outlook reflected in the bond market, indicating a more hawkish stance from the Federal Reserve.

Furthermore, the report highlights that China is also expected to demonstrate resilient economic growth, with projected GDP growth landing slightly above consensus expectations at around 5%. In contrast, the eurozone’s growth forecast remains modest, estimated at approximately 1%, driven by increased defense and infrastructure spending despite the drag from higher U.S. tariffs.

Investment Trends and Perspectives

When it comes to investment strategy, Vanguard's report shows a shift in priorities. With a growing emphasis on bonds, value equities, and international investments, Vanguard projects a more constructive medium-run outlook for multi-asset portfolios.

The anticipated performance for various asset classes includes:

• - U.S. Equities: 4.0% - 5.0% return rates
• - Ex-U.S. Equities: 4.9% - 6.9% return rates
• - U.S. Bonds: 3.8% - 4.8% return rates

Despite the prevailing excitement surrounding U.S. technology stocks and their potential growth prospects, Vanguard’s analysis indicates that risks are escalating amid this exuberance. Many investors may find more lucrative opportunities elsewhere, even those who remain optimistic about AI's transformative effects.

According to Davis, high-quality U.S. fixed income, value-oriented equities, and non-U.S. developed-market equities are primed to yield the best risk-return profiles over the next five to ten years. The resurgence of interest in fixed-income securities is evident, as they continue to provide favorable real returns owing to higher neutral rates.

Conclusion

In summary, successful long-term investment strategies will likely find a balance between fixed income and a diversified equity portfolio in the upcoming year. As Vanguard prepares its investors for potential challenges ahead, its emphasis on adaptability and forward-thinking investment strategies aligns with the rapidly transforming economic landscape driven by AI and technological advancements.

Investors are advised to stay informed and ready to pivot given the ongoing developments highlighted in Vanguard’s economic insights. As always, prudent investing requires acknowledging potentials and risks alike while navigating a world shaped by AI and innovation.

For more detailed insights and future projections, visit Vanguard's official site.