Vanguard has released its 2026 economic and market outlook, focusing on the influence of artificial intelligence (AI) on global markets. The report, titled “AI exuberance: Economic upside, stock market downside,” discusses how AI adoption could impact labor markets, productivity, and investment returns.
Joe Davis, Vanguard’s Global Chief Economist and Global Head of Investment Strategy Group, said, “We see about a 60% chance that the U.S. economy will achieve 3% real growth in the coming years. 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.”
The report notes that despite challenges in 2025 such as rising tariffs and slowing labor supply growth, economies remained resilient. In the United States, corporate earnings continued to grow due to AI investments and technological advancements.
Looking ahead to 2026, Vanguard forecasts U.S. economic growth to accelerate modestly to around 2.25%, supported by AI investment and fiscal policy measures like the One Big Beautiful Bill Act. The first half of the year may be slower because of lingering effects from tariffs and limited gains in worker productivity. Labor markets are expected to stabilize by late 2026 with unemployment staying below 4.5%. Inflation is projected to remain above 2%, which may limit the Federal Reserve’s ability to lower interest rates below an estimated neutral rate of 3.5%.
For China, Vanguard predicts that real GDP growth could reach closer to 5% rather than 4%, citing similar positive impacts from AI despite ongoing external and structural issues. In contrast, euro area growth is expected to stay near 1% in 2026 as higher U.S. tariffs are balanced by increased defense and infrastructure spending.
Vanguard’s investment outlook suggests stronger prospects for high-quality U.S. fixed income assets, value-oriented equities in the U.S., and equities in developed international markets over the next five to ten years.
The firm maintains a cautious view on U.S. growth stocks—particularly large-cap technology companies—despite their recent strong performance fueled by AI optimism. According to Vanguard’s projections, average returns for these stocks may range between 4%–5% annually over the next decade due to already-high earnings expectations and potential disruptions from new competitors.
“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,” Mr. Davis concluded. “Long-term investors will continue to benefit from a portfolio consisting of fixed income and globally diversified equities.”
Vanguard was founded in 1975 and is among the world’s leading investment management firms offering services globally through various channels including workplace plans and financial intermediaries.
The company emphasized that all projections provided are hypothetical based on simulations using historical data through its proprietary Vanguard Capital Markets Model (VCMM). These projections do not guarantee future results or reflect actual outcomes; they also caution that extreme negative scenarios may be underestimated since they might not have occurred during periods analyzed by VCMM.
All investments carry risks including loss of principal; diversification does not assure profit or protect against loss; bonds involve interest rate, credit, and inflation risk; non-U.S.-issued securities face additional country/regional or currency risks.
