Vanguard Capital Markets Model® forecasts

The updated forecasts additionally reflect enhancements to the VCMM methodology itself. These enhancements include:

• A global core model that better captures relationships across regions and diversification benefits for investment portfolios.
• Dynamic equity valuation forecasts based on forward-looking fair-value estimates, informed by long-term views on the macroeconomic environment.
• The capturing of revenue growth trends and cyclicality of profit margins in a time-varying earnings growth model.
• Currency forecasts based on economic fundamentals, with consideration of current overvaluation or undervaluation, rather than the more traditional method based on differences between interest rates.
• Policy rate views from Vanguard’s economics research team as additional inputs on the short end of the yield curve.
  

These enhancements, reflected in our forecasts for the first time, more holistically reflect real-world asset return drivers and allow for more detailed discussions of the economic and financial environment associated with our return forecasts.

Some forecasts have changed notably from what we communicated based on a December 31, 2024, running of the VCMM. Related to our model enhancements, factors include:

• Developed markets outside the U.S., in local currency terms, have higher equity return forecasts than they would have under the old model, while emerging markets have lower expected returns than they would have, driven by changes in how we model equity valuation and earnings growth.
• Expected returns for U.S. equities have increased, as a result of less projected valuation contraction based on forward-looking fair-value estimates.
• The new model forecasts a depreciating U.S. dollar relative to most major currencies (including the euro and the yen), though these other currencies are expected to strengthen less than under the previous model.
• For U.S.-based investors, the combination of the factors above results in lower forecasted returns from unhedged foreign equity investments.
• Expected fixed income returns by maturity categories vary by degrees, given our inclusion of Vanguard economists’ policy rate views.

Among the highlights related to market movements in the first quarter, domestic equities in local currency terms were boosted by material valuation contractions in the U.S., Japan, Canada, and Australia.

Note that Vanguard forecast data are not intended to imply portfolio construction advice, which should reflect such factors as an investor’s objectives and risk tolerance, as well as asset class correlations and the dispersion of expected returns.

The asset-return distributions shown here are in nominal terms—meaning they do not account for inflation, taxes, or investment expenses—and represent Vanguard’s views of likely total returns, in U.S. dollar terms, over the next 10 or 30 years; such forecasts are not intended to be extrapolated into short-term outlooks. Vanguard’s forecasts are generated by the VCMM and reflect the collective perspective of our Investment Strategy Group. Expected returns and median volatility or risk levels—and the uncertainty surrounding them—are among a number of qualitative and quantitative inputs used in Vanguard’s investment methodology and portfolio construction process. Volatility is represented by the standard deviation of returns. 

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.

The VCMM’s primary value is its utility in analyzing potential investor portfolios. VCMM asset-class forecasts—comprising distributions of expected returns, volatilities, and correlations—are key to the evaluation of potential downside risks, risk-return trade-offs, and the diversification benefits of various asset classes. Although central tendencies are generated in any return distribution, Vanguard stresses that focusing on the full range of potential outcomes for the assets considered is the most effective way to use VCMM output.

The VCMM seeks to represent the uncertainty inherent in forecasting by generating a wide range of potential outcomes. The VCMM does not impose “normality” on expected return distributions but rather is influenced by the so-called fat tails and skewness of modeled asset-class returns. Within the range of outcomes, individual experiences can be quite different, underscoring the varied nature of potential investment outcomes. Indeed, this is a key reason why we approach asset-return outlooks in a distributional framework.