Source:Vanguard.
“Just as supply-side factors such as increased productivity and plentiful labor drove robust growth amid continued disinflation in 2024, we would expect the next-most-likely scenarios to be supply-driven,” said Qian Wang, head of the Vanguard Capital Markets Model® (VCMM).
Less likely, Wang said, are demand-driven scenarios of recession and overheating.
We have updated our forecasts for the performance of major asset classes, based on the November 8, 2024, running of the VCMM. Detailed projections, including annualized return and volatility estimates covering both 10- and 30-year horizons, are available in interactive charts and tables.
The views below are those of the global economics and markets team of Vanguard Investment Strategy Group as of January 23, 2025.
Growth momentum should remain solid in the near term, supported by productivity gains and less restrictive monetary policy. Actions taken in the first days of the new U.S. administration don’t immediately change our economic outlook.
A weak growth outlook and benign inflation should translate into a relatively dovish European Central Bank (ECB) stance in 2025. However, two near-term risks to the inflation outlook—the prospect of rising natural-gas prices and a weakening euro—represent monetary policy risks as well.
A recent rise in gilt yields as part of a global sell-off, if sustained, is likely to tighten financial conditions, increasing downside risks to our economic growth forecast.
Despite its having paused in December, we expect the Bank of Japan (BoJ) to resume its rate-hiking cycle in 2025 amid a virtuous cycle of wage and price increases.
• Monetary policy: Should the economy and inflation progress in line with our outlook, we continue to expect the BoJ to raise its policy rate target to 1% by the end of 2025. The timing and scale of hikes will depend on the outcome of nationwide union wage negotiations, potential U.S. tariffs, market volatility, and domestic politics.
A strong end to the year helped China achieve its 2024 economic growth target. The headwinds could be stronger in 2025, with a spotlight on the degree of policy support offered and potential U.S. tariffs.
• Monetary policy: We foresee the policy seven-day reverse repo rate being cut to 1.2% in 2025 and further reductions to banks’ reserve requirement ratios to facilitate fiscal expansion. Although we expect the People’s Bank of China to allow for some currency depreciation in 2025 in anticipation of higher tariffs, concerns on that front could constrain the magnitude of policy rate cuts.
Restrictive monetary policy has weighed on demand while stagnant productivity continues to hold the economy back. This suggests that a sustained period of below-potential demand will be required to return inflation to the midpoint of the 2%–3% target set by the Reserve Bank of Australia (RBA).
The Bank of Canada (BoC) cut short-term interest rates by 1.75 percentage points in 2024. However, if the U.S. were to implement tariffs of 25% on Canadian goods and Canada then implemented 25% tariffs on U.S. goods, we would expect a significant drop-off in Canada’s growth and a pickup in inflation significant enough that the BoC would need to reverse course and raise interest rates.
We expect the monetary policy easing cycle to broaden, albeit with rates remaining in restrictive territory as a strong U.S. dollar threatens to stoke emerging markets inflation. Trade developments are likely to be in focus throughout 2025.
Vanguard’s 10-year annualized outlooks for broad asset class returns are unchanged since the December 2024 economic and market update. The probabilistic return assumptions depend on market conditions upon the running of the VCMM and can change with each running over time.
The projections listed below are based on a November 8, 2024, running of the VCMM. The Investment Strategy Group updates these numbers quarterly. Projections based on a December 31, 2024, running of the VCMM will be communicated through the February 2025 economic and market update. You can find our most up-to-date U.S. return forecasts, U.S. asset class valuations, and time-varying asset allocation on the econ and markets hub.
Our 10-year annualized nominal return projections, expressed for local investors in local currencies, are as follows. The figures are based on a 2-point range around the 50th percentile of the distribution of return outcomes for equities and a 1-point range around the 50th percentile for fixed income. Numbers in parentheses reflect median volatility.
Notes:
All investing is subject to risk, including the possible loss of the money you invest.
Investments in bonds are subject to interest rate, credit, and inflation risk.
Investments in stocks and bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. These risks are especially high in emerging markets.
IMPORTANT: The projections and other information generated by the Vanguard Capital Markets Model regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. VCMM results will vary with each use and over time.
The VCMM projections are based on a statistical analysis of historical data. Future returns may behave differently from the historical patterns captured in the VCMM. More important, the VCMM may be underestimating extreme negative scenarios unobserved in the historical period on which the model estimation is based.
The Vanguard Capital Markets Model® is a proprietary financial simulation tool developed and maintained by Vanguard’s primary investment research and advice teams. The model forecasts distributions of future returns for a wide array of broad asset classes. Those asset classes include U.S. and international equity markets, several maturities of the U.S. Treasury and corporate fixed income markets, international fixed income markets, U.S. money markets, commodities, and certain alternative investment strategies. The theoretical and empirical foundation for the Vanguard Capital Markets Model is that the returns of various asset classes reflect the compensation investors require for bearing different types of systematic risk (beta). At the core of the model are estimates of the dynamic statistical relationship between risk factors and asset returns, obtained from statistical analysis based on available monthly financial and economic data from as early as 1960. Using a system of estimated equations, the model then applies a Monte Carlo simulation method to project the estimated interrelationships among risk factors and asset classes as well as uncertainty and randomness over time. The model generates a large set of simulated outcomes for each asset class over several time horizons. Forecasts are obtained by computing measures of central tendency in these simulations. Results produced by the tool will vary with each use and over time.