Key Findings from Vanguard’s Forthcoming Economic and Market Outlook (December Release)
Financial markets are buoyant—and with good reason. Despite persistent headwinds from megatrends such as demographic slowdowns and rising tariffs, global economies proved resilient in 2025. In the U.S., corporate earnings remained solid, supported by strong fundamentals and significant investment in AI and other technological innovations.
According to Vanguard’s megatrends framework, supply-side dynamics are expected to shift again in 2026. The extent to which AI investment can offset mounting negative shocks will shape the economic outlook. Over the next five years, Vanguard projects an 80% probability that economic growth will deviate from consensus expectations—opening the door to unconventional, yet increasingly compelling, opportunities in what remain frothy financial markets.
Higher Growth Potential—Led by the U.S.
AI is forecast to be the dominant megatrend, given its transformative potential for labor markets and productivity. Vanguard identifies its outsized impact on growth as a central economic risk factor in 2026. The current wave of AI-related capital investment evokes past periods of industrial expansion, including the 19th-century railroad boom and the tech surge of the late 1990s.
This investment cycle remains active. Vanguard estimates a 60% chance that the U.S. could achieve real GDP growth of 3% in the coming years—substantially above most forecasts from central banks and market professionals. In the nearer term, 2026 is projected to bring more moderate growth of approximately 2.25%, bolstered by AI momentum and fiscal support from the One Big Beautiful Bill Act.
The first half of the year may feel softer, with lingering effects from stagflationary forces—particularly tariffs and demographic pressures. Productivity gains have yet to materialize broadly, and labor markets, which cooled notably in 2025, are expected to stabilize by year-end, helping to keep unemployment below 4.5%.
Continued growth is likely to keep inflation above 2% through 2026. As such, the Federal Reserve may find little room to reduce interest rates below Vanguard’s estimated neutral rate of 3.5%—a more hawkish projection than current market pricing implies.
Global Growth Divergence
AI-related momentum also informs Vanguard’s above-consensus forecast for China, where real GDP growth is expected to approach 5%, despite structural and external headwinds. By contrast, the euro area lacks similar AI-driven tailwinds. There, growth is likely to hover near 1% in 2026, with tariff-related drag offset by increased defense and infrastructure spending. Inflation should remain close to the 2% target, allowing the European Central Bank to maintain its policy stance.
A Differentiated Investment Playbook
Vanguard’s capital markets outlook reflects significant variation across regions, asset classes, and time horizons. Overall, they remain constructive on multi-asset portfolios, anticipating continued positive real returns. U.S. technology stocks may extend their performance in 2026, fueled by strong investment and earnings growth.
Nonetheless, Vanguard highlights rising risks, even if current market enthusiasm seems justified by fundamentals. More attractive opportunities are emerging, particularly for those optimistic about AI’s trajectory. Their growing conviction echoes patterns seen in prior technology-driven investment cycles.
Over the next five to ten years, Vanguard’s top-ranked public investment opportunities are:
High-quality U.S. fixed income
U.S. value-oriented equities
Non-U.S. developed market equities
They remain most cautious on U.S. growth stocks. Despite recent outperformance, Vanguard expects muted returns going forward due to high earnings expectations and the historically disruptive nature of innovation cycles, which often erode incumbent profitability. As a result, increased volatility—especially in large-cap tech—appears likely.
History shows that periods of technological transformation often yield unexpected investment winners. Regardless of whether AI delivers fully on its promise, Vanguard anticipates that U.S. value stocks and non-U.S. developed markets will ultimately benefit as AI-fueled productivity gains spread across sectors. These shifts in economic momentum tend to be mirrored in equity market leadership over the course of a full technology cycle.
Taken together, these three investment segments provide both offensive and defensive advantages—positioning investors for long-term success, irrespective of whether current AI optimism proves well-founded.
Rick Maggi, Financial Advisor Perth, Westmount Financial
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Disclaimer
This article has been carefully prepared by Westmount Securities Pty Ltd (ABN 42 090 595 289, AFSL 225715) for general information purposes only. However, neither Westmount Securities Pty Ltd nor any of its affiliates guarantee the accuracy or completeness of any statements contained herein, including any forecasts. It is important to note that past performance is not a reliable indicator of future outcomes. This material does not consider the specific objectives, financial circumstances, or needs of any particular investor. Therefore, before making any investment decisions, investors should assess the relevance of this information to their individual situation and consult professional advice, taking into account their unique objectives, financial position, and needs.