Valuations in focus
Bonds remain in favor in time-varying model portfolio
May 21, 2025
The U.S. equity market returned –0.7% in April amid a worldwide flurry of announcements about changing import tariff policies and other shifts in global supply chains and trade. Developed markets outside the U.S., on the other hand, rallied 4.7%, aided by strong corporate earnings in Europe and fiscal stimulus in Germany. Emerging equity markets overcame disappointing Chinese economic data and heightened geopolitical risks to return 0.8%.1
Global equity valuations remained elevated as of April 30, although slightly more favorable than 30 days prior. Our time-varying asset allocation (TVAA) portfolio remained risk-averse in April, with an aggregate 38% equity allocation, up just 2 percentage points from the end of March.
The portfolio maintained most of its positioning from Q1 2025, with 1-point reductions in both U.S. bonds and developed bond markets outside the U.S. funding 1-point increases in U.S. value stocks and developed equity markets outside the U.S. The allocation changes reflect a slight increase in expected equity returns and essentially unchanged expectations for fixed income.
The TVAA strategy is built on the framework of the Vanguard Asset Allocation Model (VAAM), driven by forecasts generated by the Vanguard Capital Markets Model® (VCMM). The TVAA provides a model portfolio that optimizes for higher expected risk-adjusted returns over the next decade. The TVAA is not intended to be a tactical tool used in pursuit of short-term gains. It is better thought of as a dynamic allocation based on long-term risk-return relationships, driven by current market conditions.
Further, the TVAA portfolio is intended to be informational, free from real-world constraints such as trading costs and tax consequences of recalibrating the portfolio. An investor’s goals, risk tolerance, tax situation, and preferences are important factors in determining whether the TVAA portfolio is suitable for implementation.
The TVAA strategy is also geared toward those who are comfortable with model risk—a form of active risk in which the forecasts generated by the model may not be fully realized. Nevertheless, the TVAA portfolio is useful in helping investors make informed decisions about portfolio construction and will differ from quarter to quarter as our capital market forecasts evolve over time.
For valuation-aware investors with the requisite risk tolerance, our model points to bonds
Notes: Time-varying portfolio allocations were determined by the Vanguard Asset Allocation Model (VAAM). The assets under consideration were U.S. and non-U.S. equities and fixed income, as well as real estate investment trusts (REITs), U.S. high-yield corporate bonds, and emerging markets equities, which were used to illustrate time-varying allocation not only within equities versus fixed income but also within sub-asset classes. See the notes that accompany VCMM forecasts for additional details on asset class indexes. A minimum home-bias constraint of 60% was applied for U.S. equities, and 70% was applied for U.S. fixed income. VCMM 10-year projections as of April 30, 2025, were used. The sum of individual sub-asset class allocations may not total 100% because of rounding.
Source: Vanguard calculations, as of April 30, 2025.
Portfolio characteristics
Notes: Vanguard calculations are based on portfolios optimized by the VAAM, using return projections from the VCMM. Sharpe ratio is a measure of return above the risk-free rate that adjusts for volatility. A higher Sharpe ratio indicates a higher expected risk-adjusted return. Expected maximum drawdown is the median peak-to-trough drop in the portfolio’s value in 10,000 VCMM simulations. The probability of underperforming the benchmark is in any given year.
Source: Vanguard calculations, as of April 30, 2025.
IMPORTANT: The projections and other information generated by the VCMM regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Distribution of return outcomes from the VCMM are derived from 10,000 simulations for each modeled asset class. Simulations are as of April 30, 2025. Results from the model may vary with each use and over time. For more information, please see the Notes section below.
1 Equity returns for the U.S., developed markets outside the U.S., and emerging markets are based on the CRSP US Total Market Index, the FTSE Developed All Cap ex US Index, and the FTSE Emerging Markets All Cap China A Inclusion Index, respectively. Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.
Notes: All investing is subject to risk, including the possible loss of the money you invest.
Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
Investments in bonds are subject to interest rate, credit, and inflation risk.
Investments in stocks or 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.
High-yield bonds generally have medium- and lower-range credit quality ratings and are therefore subject to a higher level of credit risk than bonds with higher credit quality ratings.
IMPORTANT: The projections and other information generated by the Vanguard Capital Markets Model (VCMM) 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 importantly, 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, U.S. municipal bonds, 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 time. Forecasts represent the distribution of geometric returns over different time horizons. Results produced by the tool will vary with each use and over time.