Vanguard's 2026 Outlook Is Here. You Might Want to Get Used to Smaller Stock Returns.

Core Insights - Vanguard highlights that while artificial intelligence (AI) is poised to be a transformative technology that could enhance the U.S. economy, it does not guarantee significant returns for stock portfolios, forecasting long-term returns in the single digits over the next decade [1][3]. Economic Outlook - In its 2026 outlook report, Vanguard presents scenarios for AI's impact, with a bullish case predicting average GDP growth of 3% from 2028 to 2035 if AI performs well [2]. - Conversely, the firm warns that positive economic growth does not necessarily translate to stock market gains, emphasizing that past double-digit returns of the S&P 500 are not assured to continue [3]. Stock Market Projections - Vanguard's base case anticipates U.S. stock returns of approximately 4% to 5% annually over the next five to ten years. In a favorable AI scenario, projections could rise to 8% to 10%, while a disappointing AI outcome could lead to returns between -2% and 2% [5][9]. - The probability assigned to the bullish case is 10%, while the bearish case is given a 30% likelihood [5]. Investment Strategy - Vanguard suggests that high-quality U.S. fixed income, U.S. value stocks, and non-U.S. developed market stocks present stronger investment opportunities compared to growth-heavy stocks that have dominated the market recently [6]. - The firm notes that AI expectations have not been fully priced into U.S. value stocks, which may outperform growth-oriented tech stocks if AI adoption leads to productivity gains [6]. Market Dynamics - There is growing skepticism among investment professionals regarding the dominance of large tech companies in the AI sector, with concerns that the market may not be accounting for potential disappointments in their performance [4][7]. - Vanguard emphasizes the risk of Big Tech being overextended post-AI development and failing to meet profit expectations [7]. Competitive Landscape - The future leadership in the AI revolution remains uncertain, with questions about whether established companies like the "Magnificent Seven" or emerging private AI startups will prevail. Historical trends suggest that early leaders in tech revolutions often do not maintain their dominance [10].