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Global inflation has decreased sharply over the last two years and is now within distance of a 2 percent target. The path to disinflation has been uneven across countries and regions, with some notable global economies facing a downturn due to monetary policy. The United States is an exception to this, having experienced an accelerating economy despite restrictive monetary policy. One of the themes explored in Vanguard's 2025 outlook will be on the supply-side forces that have shaped the U.S. economy.

"Supply side forces have the potential to create the most disruption to the Federal Reserve's soft-landing scenario," said Joe Davis, Global Chief Economist and Global Head of Investment Strategy Group. "Landing scenarios aside, the higher-for-longer interest rate environment is here to stay and has profound implications for long-term investors."

Era of sound money lives on, with a new point of tension emerging

Although central banks around the globe are now easing monetary policy, Vanguard's view that policy rates will settle at higher levels than in the 2010s remains intact. This environment sets the foundation for solid cash and fixed income returns over the next decade, but Vanguard's view on equities is more cautious. This structural theme holds even in a scenario where central banks briefly cut rates below neutral to allay temporary growth uncertainty. The era of sound money-characterized by positive real interest rates-lives on.

Higher interest rates can be celebrated, according to Vanguard researchers, despite the expected increased volatility while the market adjusts to this new normal. For a well-diversified, long-term investor, higher rates create a solid foundation for risk-adjusted returns going forward.

Long term outlook favors diversification, bond investors

Vanguard's global outlook is designed to guide investors in maintaining a long-term perspective and support the case for portfolio diversification. Fixed income will continue to play an important role as a ballast in long-term portfolios. The greatest downside risk to bonds also pertains to stocks-namely, a rise in long-term rates due to factors that could include continued fiscal-deficit spending or removal of supply-side support.

According to Vanguard, U.S. valuations are elevated but not as stretched as traditional metrics imply. Despite higher interest rates, many large corporations insulated themselves from tighter monetary policy by locking in low financing costs ahead of time. And more importantly, the market has been increasingly concentrated toward growth-oriented sectors, such as technology, that support higher valuations. International valuations are more attractive. This could continue as ex-U.S. companies' shares may be most exposed to rising economic and policy risks.

"The long-term attractiveness of bonds continues to persist in the current interest rate environment," concludes Mr. Davis. "We believe long-term investors will continue to benefit from a diversified portfolio consisting of fixed income and globally diversified equities."

Vanguard's updated 10-year annualized return projections:

• Global bonds, ex-U.S.: 4.3% - 5.3%
• U.S. bonds: 4.3% - 5.3%
• Global equities (ex-U.S., developed): 7.3% - 9.3%
• Global equities (emerging): 5.2% - 7.2%
• U.S. equities: 2.8% - 4.8%

IMPORTANT: The projections and other information generated by the Vanguard Capital Markets Model (VCMM) regarding the likelihood of various investment outcomes are hypothetical, do not reflect actual investment results, and are not guarantees of future results.

Founded in 1975, Vanguard is one of the world's leading investment management companies.

Press release

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