Vanguard Releases 2025 Economic and Market Outlook

Beyond the Landing

VALLEY FORGE, Pa., Dec. 11, 2024 /PRNewswire/ -- Vanguard today released its annual outlook on the global economy and financial markets. This year's report, "Beyond the Landing," provides investors a comprehensive economic roadmap and articulates Vanguard's updated long-term investment thesis. Vanguard's global team of economists explore essential themes that will drive the trajectory of markets, including the sustainability of U.S. economic resilience, the prospect of policy shifts, and the impact of higher interest rates on asset returns.

Global inflation has decreased sharply over the last two years and is now within distance of a 2 percent target. The path to disinflation has been uneven across countries and regions, with some notable global economies facing a downturn due to monetary policy. The United States is an exception to this, having experienced an accelerating economy despite restrictive monetary policy. One of the themes explored in Vanguard's 2025 outlook will be on the supply-side forces that have shaped the U.S. economy.

"Supply side forces have the potential to create the most disruption to the Federal Reserve's soft-landing scenario," said Joe Davis, Global Chief Economist and Global Head of Investment Strategy Group. "Landing scenarios aside, the higher-for-longer interest rate environment is here to stay and has profound implications for long-term investors."

Era of sound money lives on, with a new point of tension emerging

Although central banks around the globe are now easing monetary policy, Vanguard's view that policy rates will settle at higher levels than in the 2010s remains intact. This environment sets the foundation for solid cash and fixed income returns over the next decade, but Vanguard's view on equities is more cautious. This structural theme holds even in a scenario where central banks briefly cut rates below neutral to allay temporary growth uncertainty. The era of sound money—characterized by positive real interest rates—lives on.

Higher interest rates can be celebrated, according to Vanguard researchers, despite the expected increased volatility while the market adjusts to this new normal. For a well-diversified, long-term investor, higher rates create a solid foundation for risk-adjusted returns going forward.

Long term outlook favors diversification, bond investors

Vanguard's global outlook is designed to guide investors in maintaining a long-term perspective and support the case for portfolio diversification. Fixed income will continue to play an important role as a ballast in long-term portfolios. The greatest downside risk to bonds also pertains to stocks—namely, a rise in long-term rates due to factors that could include continued fiscal-deficit spending or removal of supply-side support.

According to Vanguard, U.S. valuations are elevated but not as stretched as traditional metrics imply. Despite higher interest rates, many large corporations insulated themselves from tighter monetary policy by locking in low financing costs ahead of time. And more importantly, the market has been increasingly concentrated toward growth-oriented sectors, such as technology, that support higher valuations. International valuations are more attractive. This could continue as ex-U.S. companies' shares may be most exposed to rising economic and policy risks.

"The long-term attractiveness of bonds continues to persist in the current interest rate environment," concludes Mr. Davis. "We believe long-term investors will continue to benefit from a diversified portfolio consisting of fixed income and globally diversified equities."

Vanguard's updated 10-year annualized return projections:

• Global bonds, ex-U.S.: 4.3% - 5.3%
• U.S. bonds: 4.3% - 5.3%
• Global equities (ex-U.S., developed): 7.3% - 9.3%
• Global equities (emerging): 5.2% - 7.2%
• U.S. equities: 2.8% - 4.8%

IMPORTANT: The projections and other information generated by the Vanguard Capital Markets Model (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 November 8, 2024. Results from the model may vary with each use and over time. For more information, please see below.

About Vanguard

Founded in 1975, Vanguard is one of the world's leading investment management companies. The firm offers investments, advice, and retirement services to tens of millions of individual investors around the globe - directly, through workplace plans, and through financial intermediaries. Vanguard operates under a unique, investor-owned structure where Vanguard fund shareholders own the funds, which in turn own Vanguard. As such, Vanguard adheres to a simple purpose: To take a stand for all investors, to treat them fairly, and to give them the best chance for investment success. For more information, visit vanguard.com.

IMPORTANT: The projections and other information generated by the Vanguard Capital Markets Model (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. VCMM results will vary with each use and over time.

The VCMM projections are based on a statistical analysis of historical data. Future returns may behave differently from the historical patterns captured in the VCMM. More important, the VCMM may be underestimating extreme negative scenarios unobserved in the historical period on which the model estimation is based.

The Vanguard Capital Markets Model® is a proprietary financial simulation tool developed and maintained by Vanguard's primary investment research and advice teams. The model forecasts distributions of future returns for a wide array of broad asset classes. Those asset classes include U.S. and international equity markets, several maturities of the U.S. Treasury and corporate fixed income markets, international fixed income markets, U.S. money markets, commodities, and certain alternative investment strategies. The theoretical and empirical foundation for the Vanguard Capital Markets Model is that the returns of various asset classes reflect the compensation investors require for bearing different types of systematic risk (beta). At the core of the model are estimates of the dynamic statistical relationship between risk factors and asset returns, obtained from statistical analysis based on available monthly financial and economic data from as early as 1960. Using a system of estimated equations, the model then applies a Monte Carlo simulation method to project the estimated interrelationships among risk factors and asset classes as well as uncertainty and randomness over time. The model generates a large set of simulated outcomes for each asset class over several time horizons. Forecasts are obtained by computing measures of central tendency in these simulations. Results produced by the tool will vary with each use and over time.

All investing is subject to risk, including the possible loss of the money you invest.

Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.

Diversification does not ensure a profit or protect against a loss.

Investments in bonds are subject to interest rate, credit, and inflation risk.

Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. These risks are especially high in emerging markets.

© 2024 The Vanguard Group, Inc. All rights reserved.

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