Vanguard 2026 Forecast: What Lower Stock Returns Mean for Investors

Vanguard’s 2026 investment outlook delivers a sobering message for investors who have grown accustomed to strong equity performance. After years of double digit gains driven by technology stocks and AI optimism, Vanguard expects U.S. equities to enter a period of more modest returns.

According to the firm, average annualized returns for U.S. stocks are projected to fall within the 4% to 5% range over the next five to ten years. This forecast represents a meaningful shift from recent market experience and challenges assumptions that artificial intelligence alone can sustain outsized equity gains.

The outlook does not dismiss AI as a transformative force. Instead, it highlights the growing disconnect between economic potential and stock market expectations.

Key Takeaways

• Vanguard forecasts U.S. stock returns of 4% to 5% annually over the next decade
• AI may boost economic growth without guaranteeing strong equity performance
• Bull case returns could reach 8% to 10%, but Vanguard assigns low probability
• Bear case could see returns between negative 2% and 2%
• Value stocks and non U.S. markets may outperform growth heavy indices

Vanguard’s Core 2026 Market Outlook

Vanguard’s projection reflects a reassessment of risk and valuation rather than a rejection of innovation. The firm emphasizes that stock returns are driven by starting valuations, earnings growth, and investor expectations.

After years of expansion in price to earnings multiples, U.S. large cap stocks now embed high assumptions about future profitability. This leaves little margin for error.

Vanguard’s base case assumes that future returns normalize closer to historical averages once valuation excesses are worked off.

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Why AI May Not Deliver Market Beating Returns

Economic Growth Does Not Equal Stock Market Returns

Vanguard acknowledges that AI could meaningfully increase productivity and GDP growth. In its bullish scenario, U.S. GDP growth could average around 3% between 2028 and 2035.

However, higher economic growth does not automatically translate into higher equity returns. Much of AI’s expected benefit may already be priced into stock valuations.

This distinction is critical. Markets discount future expectations long before productivity gains fully materialize.

The Risk of Overpriced Expectations

Many of today’s largest technology companies have benefited from aggressive multiple expansion driven by AI narratives. Vanguard warns that this creates asymmetric risk.

If AI adoption meets expectations, returns may simply align with already elevated valuations. If adoption disappoints or profits lag capital investment, downside risk increases significantly.

This is why Vanguard assigns only a 10% probability to its AI bull case.

Bull, Base, and Bear Case Scenarios Explained

Vanguard’s outlook is built around three primary scenarios, each reflecting different AI outcomes and valuation paths.

Base Case Scenario

• U.S. stocks return approximately 4% to 5% annually
• AI adoption progresses steadily but without dramatic profit surprises
• Valuations gradually compress toward long term averages

This is Vanguard’s most likely outcome.

Bull Case Scenario

• AI drives exceptional productivity and profit growth
• Annual stock returns improve to 8% to 10%
• Vanguard assigns roughly 10% probability

Even in this optimistic scenario, returns remain below the strongest periods of the last decade.

Bear Case Scenario

• AI fails to generate expected returns on capital
• Economic growth resembles post 2008 stagnation
• Stock returns range from negative 2% to 2% annually

Vanguard assigns a 30% probability to this outcome, underscoring downside risk.

Implications for Big Tech and the Magnificent Seven

Dominance Is Not Guaranteed

Vanguard highlights an often overlooked historical pattern. Early leaders in major technology revolutions rarely maintain dominance indefinitely.

The Magnificent Seven stocks have driven much of the S&P 500’s performance. However, history suggests that innovation cycles eventually favor new entrants.

Vanguard notes that many hyperscalers did not exist during prior technology booms, reinforcing the risk of creative destruction.

Capital Intensity and Profitability Risk

AI development requires enormous capital investment. Data centers, chips, energy infrastructure, and talent costs continue to rise.

If returns on these investments fall short, profit margins may compress even as revenues grow. This creates a scenario where economic progress does not translate into shareholder value.

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Why Vanguard Favors Value and Diversification

U.S. Value Stocks

Vanguard sees better risk adjusted opportunities in U.S. value stocks. These stocks have not been bid up by AI narratives and carry lower valuation risk.

If productivity gains spread across the economy, value oriented sectors may benefit disproportionately.

Non U.S. Developed Markets

International developed markets also appear more attractively priced relative to the U.S. Vanguard believes lower starting valuations improve long term return potential.

Diversification reduces reliance on a single market or theme.

Fixed Income Opportunities

Higher interest rates have restored the role of high quality fixed income. Vanguard views bonds as offering competitive risk adjusted returns compared to stretched equities.

This marks a return to balanced portfolio construction after years of equity dominance.

What This Means for Long Term Investors

Vanguard’s outlook suggests investors should recalibrate expectations rather than exit markets entirely. Lower returns do not mean poor outcomes, but they do require discipline.

Key implications include:

• Reduced reliance on growth heavy indices
• Greater importance of diversification across regions and styles
• Increased focus on valuation rather than narratives
• More realistic assumptions in retirement and wealth planning

Investors accustomed to double digit returns may need to adjust contribution rates and timelines.

The Role of Patience and Risk Management

Vanguard emphasizes that periods of lower returns are not unusual. They often follow extended bull markets characterized by valuation expansion.

Risk management becomes more important when return potential declines. This includes:

• Maintaining diversified allocations
• Avoiding concentration in crowded trades
• Rebalancing portfolios systematically

Long term success depends more on consistency than chasing themes.

Final Thoughts

Vanguard’s 2026 forecast serves as a reality check for investors shaped by an extraordinary decade of equity performance. While AI remains a powerful force, it does not eliminate the fundamental drivers of market returns.

Lower expected returns do not signal failure. They signal normalization.

Investors who adapt by focusing on diversification, valuation discipline, and realistic expectations are better positioned to navigate the next decade. Vanguard’s message is not pessimistic, but pragmatic. The era of easy gains may be ending, but opportunity remains for those willing to adjust.

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FAQs

What is Vanguard’s forecast for U.S. stock returns

Vanguard expects average annual returns of 4% to 5% for U.S. stocks over the next five to ten years.

Does Vanguard believe AI will fail

No. Vanguard believes AI is transformative but warns that its benefits may already be priced into stock valuations.

What happens in Vanguard’s bear case

In the bear case, U.S. stock returns range from negative 2% to 2%, with economic growth resembling post 2008 stagnation.

Which assets does Vanguard favor

Vanguard favors U.S. value stocks, non U.S. developed market equities, and high quality fixed income.

Should investors exit the stock market

No. Vanguard recommends adjusting expectations and diversification rather than abandoning equities altogether.