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.
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Key points
- Economics and earnings often determine short-term equity returns. But valuations act like gravity over the long run, bringing returns closer to historical norms.
- US equity valuations are stretched – which could continue for a while but makes them more vulnerable to shocks in the near term.
- Across regions, investment, especially in technology and infrastructure, is proving a critical support for growth, but its impact is uneven and often offset by structural or policy headwinds.
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.
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Attribution models that attribute asset returns to the drivers.
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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
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