Vanguard research December 2025Vanguard economic and market outlook for 2026AI exuberance: Economic upside, stock market downsideRapid evolution has increased AI’s potential to become a transformative economic force, with promising implications for productivity across industries. Adoption is accelerating, and while today’s AI leaders dominate headlines, tomorrow’s winners may look very different. The outlook for markets is nuanced.Higher growth is on the horizonOn the back of AI capital investment and a potential productivity surge, the U.S. economy could eventually grow by 3%. Solid growth and still-sticky inflation will leave the Federal Reserve with limited room to cut rates below our 3.5% estimate of the neutral rate, which would neither promote nor restrict economic activity. Page 3.Equity markets may remain exuberant but face rising risksIn the near term, growth- and tech-heavy U.S. equities could continue to play an outsized role in shaping sentiment across global capital markets. However, U.S.-based AI scalers’ trackrecord of growing earningsyear after year will comeunder renewed scrutinyas they embark onunprecedented AI capitalinvestment. Page 10.We favor fixed income and value stocksWe maintain our view that high-quality bonds offer compelling real returns. From a risk-return perspective, both U.S. value-oriented and non-U.S. developed markets equities provide more attractive prospects than U.S. growth equities, especially if AI transforms the economy. These asset classes should benefit most over time as AI’s boost to productivity broadens to consumers of the technology. Page 15.For institutional and sophisticated investors only. Not for public distribution. Contents3Global outlook summary5Our outlook for AI 15Market and portfolio outlook 20Regional economic outlooksVanguard’s 2026 economic forecastsCountry/regionGrowthCore inflationUnemployment ratePolicy rate (year-end)Key risk to our viewU.S.2.25%2.6%4.2%3.5%AI optimism collapses and investment buildout stallsEuro area1.2%1.8%6.3%2.0%Inflation materially undershoots the 2% targetChina4.5%1.0%5.1%1.2%Technology innovation and investment accelerate Notes: Forecasts are as of December 10, 2025. For the U.S., growth is defined as the year-over-year change in fourth-quarter GDP. For the euro area and China, growth is defined as the annual change in GDP in the forecast year compared with the previous year. Core inflation excludes volatile food and energy prices. For the U.S. and the euro area, core inflation is defined as the year-over-year change in the fourth quarter compared with the previous year. For China, core inflation is defined as the average annual change compared with the previous year. For the U.S., core inflation is based on the core Personal Consumption Expenditures Index. For the euro area and China, core inflation is based on the core Consumer Price Index. For U.S. monetary policy, Vanguard’s...
