VALLEY FORGE, PA — Vanguard is urging investors to temper enthusiasm for artificial intelligence–driven markets, warning that while AI could meaningfully boost economic growth, today’s stock prices may already reflect overly optimistic expectations.
In its newly released 2026 economic and market outlook, Vanguard said financial markets remain “exuberant,” supported by strong U.S. corporate earnings and heavy investment in artificial intelligence. However, the firm cautioned that the same forces fueling optimism may also increase downside risk for equity investors, particularly in U.S. growth and technology stocks.
Vanguard’s economists estimate a roughly 60% probability that the U.S. economy achieves sustained real growth of about 3% in the coming years. That outlook, however, does not fully extend to 2026. For the year ahead, the firm forecasts U.S. GDP growth of approximately 2.25%, citing lingering effects from tariffs, a plateau in labor supply, and delayed productivity gains, even as AI investment provides support.
The firm expects the unemployment rate to stabilize near 4.2% by the end of 2026, while core inflation remains above the Federal Reserve’s 2% target, around 2.6%. With inflation proving sticky, Vanguard said the Fed is likely to have limited room to cut interest rates, projecting a neutral policy rate near 3.5%, a more hawkish view than current bond market pricing.
Globally, Vanguard’s outlook diverges by region. The firm sees China’s economic growth in 2026 more likely near 5% than 4%, driven in part by AI-related investment, despite ongoing structural and geopolitical challenges. In contrast, growth in the euro area is expected to hover around 1%, with higher U.S. tariffs offset by increased defense and infrastructure spending.
For investors, Vanguard’s capital market projections point away from the most crowded trades. Over the next five to ten years, the firm expects U.S. equities to deliver average annual returns of 4% to 5%, a forecast weighed down largely by subdued expectations for large-cap technology stocks. Ex-U.S. equities are projected to return 4.9% to 6.9%, while U.S. bonds are expected to generate 3.8% to 4.8% annually.
Vanguard said the most attractive risk-return opportunities are emerging in high-quality U.S. fixed income, U.S. value-oriented equities, and non-U.S. developed-market stocks. The firm emphasized that higher neutral interest rates have restored the appeal of bonds as a source of income and diversification, particularly if AI-driven growth fails to meet current expectations.
Despite its caution on equity valuations, Vanguard said it remains constructive on the broader economic impact of artificial intelligence over time, noting that productivity gains are likely to spread beyond the technology sector as adoption widens.
Founded in 1975, Vanguard is one of the world’s largest investment management firms and operates under an investor-owned structure. The company said its outlook is intended to help investors navigate a market environment where optimism about innovation remains high, but the margin for disappointment is growing .
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