Vanguard Predicts AI-Centered Economy, Steady Inflation in 2026

Despite headwinds toward financial markets in 2025 like demographic slowdowns and rising tariffs, U.S. economic growth remained resilient, according to Vanguard, powered by artificial intelligence investments and other positive technology stocks driving corporate earnings growth.

The ability for AI investments to counteract negative shocks frames the viewpoint of Vanguard’s 2026 economic and market outlook, “AI Exuberance: Economic Upside, Stock Market Downside,” released on December 10, which predicts AI to be “the foundation for the next wave of economic progress.”

“The AI economy is here,” said Roger Aliaga-Díaz, Vanguard’s Americas chief economist and global head of portfolio construction, in an online conversation with reporters.

While the AI capital investment cycle is in its early stages, mirroring other historic trajectories like early stages of the computer, the road ahead is long. The next phase depends on what Vanguard calls “AI scalers,” or S&P 500 companies in the software and services, technology hardware, semiconductors and electric utilities sectors. These AI scalers appear capable, according to Vanguard, of following through on their $2.1 trillion capital investment commitments into 2027, leading a new AI-forward investment cycle.  

Growth in 2026 Should Outpace 2025

To adequately adapt to the changes predicted in the outlook, advisers will need to incorporate a varying allocation approach, according to the report. Vanguard’s advised portfolio, which consists of 40% equities and 60% fixed income, is expected to balance near-term growth, uneven long-term return projections and lessons from the history of investing during technology cycles.

The U.S. is positioned for moderate growth acceleration at about 2.25% in 2026, up from the 2025 prediction, supported by AI investment and fiscal stimulus from the One Big Beautiful Bill Act. This momentum is expected to keep U.S. inflation persistent, remaining greater than 2% by the end of 2026.

The combination of solid growth and steady inflation suggests that the Federal Reserve will have limited room to cut its Open Market Committee’s overnight lending rate lower than Vanguard’s estimated neutral rate of 3.5%.

“For the Federal Reserve … we are of the mind that they will potentially not deliver as many interest rate eases as the bond market expects,” said Vanguard Global Chief Economist Joe Davis during the discussion.

The Case for Fixed Income

Vanguard’s capital markets projections predicted the strongest risk-return profiles across public investments over the next five to 10 years will be high-quality U.S. fixed income, followed by U.S. value-oriented equities and non-U.S. developed markets equities.

“Central to our economic outlook is that interest rates will stay higher for longer … as such high-quality fixed income offers the strongest risk return profile in the long term, regardless of what [the] central bank will do in 2026,” said Qian Wang, Vanguard’s Asia-Pacific chief economist and global head of capital market research, in the meeting.

10-Year Outlook

Volatility in the U.S. stock market is likely to increase, and Vanguard’s muted forecast of 4% to 5% average returns over the next 5 to 10 years is driven by its risk-return assessment of large-cap technology companies.

For advisers, a varied allocation approach will be essential.

“Of course there are investors that have more long-term goals, like perhaps they are saving for retirement or for college here in the U.S., and they have less appetite for active risk in the form of forecast risk,” Aliaga-Díaz said. “For those investors the traditional [60% equities, 40% bonds portfolio] approaches are perfectly OK.”

Forecasts were published on December 10, and U.S. growth was defined as the year-over-year change in fourth-quarter gross domestic product, per the report.