Economic growth and investment accelerate, but lofty valuations temper expectations for US equities.
Artificial intelligence could deliver a meaningful lift to economic growth over the next several years, but investors expecting the same payoff in US stock returns may be disappointed, according to a new report.
In its annual forecast, Vanguard offers a balanced assessment of an AI-driven expansion that supports productivity, capital investment and longer-term growth, while at the same time creating headwinds for equity investors, particularly in the US market.
The report, prepared by the firm’s global economics, markets and portfolio construction teams, suggests enthusiasm for AI has moved faster than the ability of many companies to convert that excitement into shareholder value.
It projects US economic growth of roughly 2.25% in 2026, aided by an increase in capital spending tied to AI infrastructure and enabling technologies. Core inflation is expected to cool to about 2.6% by the end of 2026, while unemployment is forecast to hover near 4.2%.
In Europe, inflation is projected to fall below the European Central Bank’s 2% target, reinforcing expectations for a more accommodative policy backdrop.
But this positive outlook does not translate into optimism for US equities, with the firm warning that stock prices already reflect elevated expectations for earnings growth and profitability.
That leaves valuations vulnerable if AI investments fail to deliver returns at the pace markets anticipate and the firm’s analysis indicates that large-scale AI spending generates positive net present value primarily for companies with durable competitive advantages and access to inexpensive capital, while firms with weaker moats face a tougher path to payoff.
The report outlines three potential paths for US equity returns over the next decade.
In the most bullish scenario, where AI adoption proves more transformative than expected, annualized returns could reach 8% to 10%, though Vanguard assigns this outcome a relatively low probability. Its base case assumes AI evolves into a general-purpose technology that supports trend growth, producing more restrained returns of 5% to 7%.
A downside scenario, in which enthusiasm fades and valuations contract, could leave investors facing returns ranging from slightly positive to negative in real terms.
Bonds, by contrast, receive a more favorable assessment with the firm arguing that higher estimates of neutral interest rates point to healthier long-term prospects for fixed income than investors experienced in the post–financial crisis era. As a result, the firm favors diversified portfolios with a substantial bond allocation and a measured approach to equity risk.
Vanguard also challenges fears that AI will trigger widespread job losses. Its research shows that occupations with high exposure to AI have continued to post job and wage growth comparable to other roles, suggesting near-term labor disruption may be more limited than widely feared.