Vanguard has released its annual outlook on the global economy and financial markets. This year’s report, “AI exuberance: Economic upside, stock market downside,” provides investors with 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 percent chance that the U.S. economy will achieve 3 percent 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 percent, 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 percent. Economic growth is expected to keep U.S. inflation somewhat persistent, remaining above 2 percent 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 percent. The Fed forecast is a bit more hawkish than the bond market’s expectations.

Given similar AI-related dynamics, the 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 percent than 4 percent. 

Conversely, Vanguard’s risk assessment for the euro area is more consensus-like, given the lack of strong AI dynamics. They anticipate growth to hover near 1 percent 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 percent 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 clear: Risks are growing amid this exuberance, even if it appears “rational” by some metrics.

More compelling investment opportunities are emerging elsewhere even for those investors most bullish on AI’s prospects. Its conviction in this view is growing, and it parallels investment returns in previous technology cycles. The capital market projections show that the strongest risk-return profiles across public investments over the coming 5-to-10 years are, in order:

Vanguard maintains its secular view that high-quality bonds (both taxable and municipal) offer compelling real returns given higher neutral rates. Returns should average near current portfolio income levels, a comfortable margin over the rate of expected future inflation. That’s the primary reason why bonds are back, regardless of what central banks do in 2026. Importantly, U.S. fixed income should also provide diversification in a world where AI disappoints, leading to lower growth.

They remain most guarded in the assessment of U.S. growth stocks. Their muted expected returns for the technology sector are entirely consistent with our more bullish prospects for an AI-led U.S. economic boom. The heady expectations of U.S. technology stocks are unlikely to be met for at least two reasons.

The first is the already-high earnings expectations and the second is the typical underestimation of creative destruction from new entrants into the sector which erodes aggregate profitability. Our muted U.S. stock return forecast of 4–5 percent average returns over the next 5-to-10 years is nearly single-handedly driven by our risk-return assessment of large-cap technology companies.

Both U.S. value-oriented and non-U.S. developed-market equities should benefit most over time as AI’s eventual boost to growth broadens to consumers of AI technology. Economic transformations are often accompanied by such equity market shifts over the full technology cycle.

“Despite the glamor of the tech-heavy U.S. equity market, more compelling investment opportunities are emerging in high-quality fixed income, U.S. value, and ex-U.S. equity—even for those investors most bullish on AI’s prospects,” said Davis. “Long-term investors will continue to benefit from a portfolio consisting of fixed income and globally diversified equities.”

Learn more about the 2026 economic and market outlook at Vanguard.

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Editor’s Note: This post was originally published on VISTA.Today in December 2025.