Joe Davis: In 2026, AI investment is likely to accelerate and continue to transform the global economy. That sort of investment in businesses and companies has the prospect to have slightly higher than expected economic growth in the United States and some other leading markets. This should stabilise the labour market and could even lead to somewhat fewer than expected interest rate cuts from the Federal Reserve.
Our outlook for the financial markets is also generally constructive, but with one important nuance. AI related stocks, particularly in the United States, have done astoundingly well over the past several years. But our study and analysis of financial market history reveals one compelling thesis, and that is over time, areas outside of the technology field will start to outperform more strongly as they benefit from the technology itself. So, areas such as value stocks in the United States and investments outside of the United States should increasingly offer attractive returns.
And then finally, areas such as fixed income, which provide not only higher income expected as interest rates should remain above the rate of inflation but also provide just a modest defensive posture should this sort of exuberance continue to the sky.
Vanguard’s Investment Strategy Group
Our Investment Strategy Group serves as our lead in-house think tank. This team of economists, investment strategists and quantitative investment analysts produces relevant and rigorous insights on economics, markets, portfolio strategies and investor behaviour to improve investor outcomes and decision-making. The group also develops and oversees our proprietary modelling and forecasting tools.
Key credentials
A global team across disciplines
35 economists across 6 locations, including 7 CFAs and 13 PhDs.
Actionable insights and analysis
An in-house partner to our investment management teams, businesses and senior leadership team.
Rigorous primary research
In-depth primary research on a broad range of topics important to both investors and the industry.
Key points
- Middle East tensions are shifting the balance of risks towards higher inflation and weaker economic growth.
- Macro dispersion is likely to persist as strength in the US, for example, contrasts with softer conditions in parts of Europe and the UK, partly due to energy and geopolitical pressures.
- Policy responses will diverge, as central banks balance risks to higher inflation with downside risks to growth.
Our latest asset-class return outlook
The Vanguard Capital Markets Model® (VCMM) is a sophisticated financial simulation engine that powers our investment outlook and asset allocation decisions. You can find the latest forecasts for equity and bond markets below.
A global, dynamic model that forecasts the drivers of long-term asset returns such as yield curves and equity market valuations.
Attribution models that attribute asset returns to the drivers.
A simulation engine to model the probability distribution of outcomes.
AI exuberance: Economic upside, stock market downside
Joe Davis, Vanguard’s Global Chief Economist, explains how AI is shaping our outlook for 2026 and beyond.
Key points
AI investment drives growth
AI is powering US corporate earnings and is expected to be the main driver of productivity and economic expansion over the next five years.
Divergence from consensus
We see an 80% chance that economic growth will diverge from consensus forecasts, with AI investment as the critical swing factor.
US outperformance likely
The US is positioned for stronger growth (up to 3% real GDP possible), supported by AI and fiscal stimulus. Meanwhile, the UK and euro area face more muted prospects.
Asset class outlook
Over the next 5 to 10 years, we project the strongest risk-return profiles for high-quality fixed income, US value equities and ex-US developed market equities.
Risk and volatility rising
Despite rational exuberance, risks are mounting, especially in US growth stocks. This is due to high expectations and sector volatility and makes selectivity and diversification essential.
Outlook resources
Vanguard 2026 economic and market outlook
Practice management
Tailored content to help you build your practice, market your services effectively and cultivate a thriving professional network.
Financial planning
Gain access to useful tools, guides and multimedia resources covering diverse topics from risk profiling to retirement planning.
Client relationships
CPD content crafted to empower you to service your client’s needs effectively, build relationships, create loyalty and achieve new business growth.
Investment knowledge
CPD content formulated for you to explore in-depth insights on investment principles, portfolio construction and comprehensive product education to expand your technical knowledge.
Investment risk information
The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.
Important information
This article is designed for use by, and is directed only at persons resident in the UK.
The information contained in this article is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so. The information in this document does not constitute legal, tax, or investment advice. You must not, therefore, rely on the content of this article when making any investment decisions.
The information contained in this article is for educational purposes only and is not a recommendation or solicitation to buy or sell investments.
© 2026 Vanguard Asset Management, Limited. All rights reserved.
Vanguard Asset Management, Limited is authorised and regulated in the UK by the Financial Conduct Authority.