Vanguard Economic and Market Outlook for 2026

In 2026, AI investment is likely to accelerate in continuing to transform the global economy.

That sort of investment in businesses and companies has the prospect to have slightly higher than expected economic growth in the United States and some other leading markets.

This should stabilize the labor market and could even lead to somewhat fewer than expected interest rate cuts by the Federal Reserve.

Our outlook for the financial markets is also generally constructive, but with one important nuance. 

AI-related stocks, particularly United States, have done astoundingly well over the past several years.

But our study and analysis of financial market history reveals one compelling thesis.

And that is, over time, areas outside of the technology field will start to outperform more strongly as they benefit from the technology itself.

So areas such as value stocks in the United States and investments outside of the United States should increasingly offer attractive returns. 

And then finally, areas such as fixed income, which provide not only higher income expected as interest rates should remain above the rate of inflation but also provide just a modest defensive posture should this sort of exuberance continue to the sky.

We’re underweighting stocks in our time-varying portfolios. For example, we’re more conservative than the traditional 60 percent stocks / 40 percent bonds risk profile. We’re at 40/60.

Why? It’s not pessimism about AI or the economy; it’s about risk from a stock market correction.

U.S. equity market valuations are stretched. Sure, stocks have gone gangbusters for much of 2025 and, who knows, the momentum and hype may continue for a while. But our analysis of fundamental drivers points to greater odds that longer-term returns will be subdued, below historical averages.

Meanwhile, bonds remain attractive in the high-interest-rate environment. Our models project that, over the next decade, a 40/60 portfolio can achieve similar returns to a 60/40, but with less risk. In other words, markets may not appropriately reward the additional risk of stocks. 

We also balance risk within asset classes. Corporate debt valuations are stretched, so we’re cautious about credit and high yield, but we’re overweight Treasuries.

Within equities, our cautious views stem from growth stocks. Their prices already reflect high expectations for AI, so they have little room for expansion. 

Our view on value stocks is more constructive. It may seem counterintuitive, but if AI and technology deliver on their promise, value stocks are the ultimate beneficiaries.

Finally, non-U.S. stocks have enjoyed a big runup in 2025, so their valuation gap with U.S. stocks isn’t as great as it once was. But their return prospects remain attractive, and they play a valuable portfolio diversification role. 

We are bullish on AI’s potential to transform the economy. But transformative technology needs profitable business models to win. 

And, in the financial markets, returns hinge on expectations. Tech companies’ earnings have been strong so far, but their valuations may have gotten ahead of themselves. When expectations get too far out of whack, it is not surprising to see markets pull back.

Our long-term expected returns for non-U.S. stocks are higher than for U.S. stocks. Non-U.S. stocks had a strong rally in 2025, so the gap in future expected returns isn’t as great as it had been. But they still provide valuable diversification benefits. 

Now, within the U.S. market, we expect muted returns for growth companies, but we’re more constructive on value stocks. 

We don’t foresee the Fed cutting interest rates to a great degree in 2026, given our expectations for solid economic growth, sticky inflation, and a low unemployment rate. There’s also a higher neutral rate—the level that neither stimulates nor restricts economic activities.

We expect U.S. interest rates to be higher than consensus and higher than the rate of inflation, for longer. So fixed income will remain attractive even beyond the important portfolio diversification benefits that it offers.