Vanguard Releases 2026 Economic and Market Outlook

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December 10, 2025 AI exuberance: Economic upside, stock market downside VALLEY FORGE, PA (December 10, 2025)—Vanguard today released its annual outlook on the global economy and financial markets. This year’s report, AI exuberance: Economic upside, stock market downside, provides investors an economic roadmap and Vanguard's updated long-term investment thesis. Vanguard’s global team of economists outlines the impact of artificial intelligence on the trajectory of markets, including how broader adoption of AI may affect the labor market, economic productivity and output, as well as equity and fixed income return prospects. Financial markets are exuberant—and there are some good reasons for that. Despite major headwinds in 2025 like rising tariffs, sudden plateauing of labor supply, and growth slowdowns, economies held firm. U.S. corporate earnings growth and fundamentals stayed strong, powered by AI investment and other positive technology shocks. “We see about a 60% chance that the U.S. economy will achieve 3% real growth in the coming years,” said Joe Davis, Global Chief Economist and Global Head of Investment Strategy Group. “But this future is not quite now for 2026. For next year, how well AI investment will counteract negative (supply-side) shocks shapes our economic outlook. Balancing these near- and medium-term views shapes Vanguard’s investment outlook, which identifies somewhat unconventional, yet compelling investment opportunities for today’s frothy financial markets.” United States economic forecasts Higher growth is on the horizon, particularly for the U.S. AI investment’s outsized contribution to economic growth represents the key risk factor. In 2026, the U.S. is positioned for a more modest acceleration in growth to about 2.25%, supported by AI investment and fiscal tailwind from the One Big Beautiful Bill Act. The first half of the year may be softer given the lingering stagflationary effects of tariffs and labor supply plateauing, as well as yet-to-materialize broad-based gains in worker productivity. Labor markets, which cooled markedly in 2025, should stabilize by the end of 2026, helping keep the unemployment rate below 4.5%. Economic growth is expected to keep U.S. inflation somewhat persistent, remaining above 2% by the close of 2026. This combination of solid growth and still-sticky inflation suggests that the Federal Reserve will have limited scope to cut rates below our estimated neutral rate of 3.5%. Our Fed forecast is a bit more hawkish than the bond market’s expectations. Given similar AI-related dynamics, our forecast for China’s economic growth in 2026 is also above consensus expectations. Despite ongoing external and structural challenges, real GDP growth is more likely to register 5% than 4%. Conversely, our risk assessment for the euro area is more consensus-like given the lack of strong AI dynamics. We anticipate growth to hover near 1% in 2026, as the drag from higher U.S. tariffs is offset by increased defense and infrastructure spending. Inflation should stay close to the 2% target, allowing the European Central Bank to maintain its current policy stance throughout the year. Investment outlook favors bonds, value and international equities 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 as of 10/31/2025. Results from the model may vary with each use and over time. For more information, please see below. Overall, our medium-run outlook for multiasset portfolios remains constructive, with positive after-inflation returns likely to continue. In 2026, U.S. technology stocks could well maintain their momentum given the rate of investment and anticipated earnings growth. But let us be clea