Vanguard 2025 Outlook: U.S. Stocks Can “Defy Their Valuation Gravity”

• Vanguard released its market and economic outlook for 2025.
• The asset manager looks at whether the market can continue to rise with stocks at high valuations.
• It also forecasts its expectations for inflation and rates.

Vanguard released a preview of its 2025 economic and market outlook, and while optimistic, it includes some caveats.

Vanguard Group is cautiously optimistic about the direction of the stock market in 2025, but the hopeful tone in its latest global economic and market update is tinged with some caveats that could impact the outlook.

In the report, a preview of its full 2025 outlook called Beyond the Landing, to be released in December, Vanguard analysts offer their forecast for U.S. stocks, as well as economies around the world.

The key question on stocks is whether or not they can continue to perform and “defy their valuation gravity.”

Rates Will Settle Higher than 2010s

The economy seems to have had a soft landing, with strong GDP growth, solid labor markets, and falling inflation. But Vanguard attributes this to more than the Federal Reserve engineering a soft landing through monetary policy.

“Rather, continued U.S. robustness may owe more to fortuitous supply-side factors, including higher productivity growth and a surge in available labor. Higher output and lower inflation can generally coexist only when the supply-side forces are in the driver’s seat,” the outlook report says.

However, Vanguard economists cite emerging policy risks to these supply-side growth drivers, including the implementation of trade tariffs and stricter immigration policies.

Under a scenario where these policies take hold, Vanguard says U.S. real GDP growth could drop from its present 2.8% to closer to 2%. They would also increase inflationary pressures, which is why Vanguard forecasts core inflation to remain above 2.5% for most of 2025.

On interest rates, Vanguard targets the federal funds rate of 4% in 2025, which would be above the median target of 3.4% set by the Fed in its September Summary of Projections. That would be only 50 to 75 basis points lower than the current federal funds rate, so Vanguard is suggesting minimal cuts in 2025.

“Cuts beyond that would prove difficult as any weakening of growth would have to be weighed against a potential inflation revival,” they wrote.

Vanguard economists maintain that rates will settle at higher levels than they did in the 2010s when they were less than 1% for most of the decade, which should lead to solid cash and fixed-income returns over the next decade. But the equity view is more cautious.

Mid-90s Boom or Late-90s Bubble?

For 2025, Vanguard analysts say the economic and policy risks will shape whether stock momentum or valuations dominate the market next year.

While stock valuations are elevated, Vanguard analysts contend that they are not as stretched as traditional metrics suggest. That’s because many large corporations insulated themselves by locking in low financing costs ahead of the Fed’s tightening regime. Plus, the market is more concentrated in growth-oriented sectors, which support higher valuations.

Thus, Vanguard analysts believe it likely that U.S. markets are in the midst of a valuation-supporting productivity boom, similar to the mid-1990s. But that likelihood must be weighed against the possibility that the current high-valuation environment could also be like the 1999 bubble, should an economic downturn occur that exposes the vulnerability of current valuations.

“But history shows that, absent an economic or earnings growth shock, U.S. equity market returns can continue to defy their valuation gravity in the near term,” the report states.

Vanguard did not offer a target for the in this report but is more cautious about the impact of valuations on long-term returns.

“The range of possible outcomes is wide, and valuations are rarely a good timing tool,” Vanguard analysts wrote in the report. “Ultimately, high starting valuations will drag long-term returns down.”

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