Economics and markets
December 23, 2025
There’s been considerable hype about AI. But even the most transformative technology needs profitable business models to succeed. Qian Wang, Vanguard global head of capital market research, explains in this short video that although tech earnings have been strong, valuations may have outpaced fundamentals—raising the risk of a market pullback.
Our long-term outlook favors non-U.S. equities for their higher expected returns and diversification benefits. Within the U.S., we see muted prospects for growth stocks but have a more constructive view on value.
And with interest rates likely to remain above inflation, fixed income continues to offer attractive opportunities beyond its role as a portfolio diversifier.
Watch the video for insights on valuations, interest rates, and global diversification.
Read the transcript
Qian Wang: We are bullish on AI’s potential to transform the economy. But transformative technology needs profitable business models to win.
And, in the financial markets, returns hinge on expectations. Tech companies’ earnings have been strong so far, but their valuations may have gotten ahead of themselves. When expectations get too far out of whack, it is not surprising to see markets pull back.
Our long-term expected returns for non-U.S. stocks are higher than for U.S. stocks. Non-U.S. stocks had a strong rally in 2025, so the gap in future expected returns isn’t as great as it had been. But they still provide valuable diversification benefits.
Now, within the U.S. market, we expect muted returns for growth companies, but we’re more constructive on value stocks.
We don’t foresee the Fed cutting interest rates to a great degree in 2026, given our expectations for solid economic growth, sticky inflation, and a low unemployment rate. There’s also a higher neutral rate—the level that neither stimulates nor restricts economic activities.
We expect U.S. interest rates to be higher than consensus and higher than the rate of inflation, for longer. So fixed income will remain attractive even beyond the important portfolio diversification benefits that it offers.
For more details, read our 2026 economic and market outlook.
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. Diversification does not ensure a profit or protect against a loss.
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.