As the company that pioneered the concept of index fund investing and currently has a whopping $11 trillion in assets under management, Vanguard is the ultimate heavyweight in the American stock market. (1)
So when the company puts out a report about the future of the stock market it’s worth closer attention. In July, the company published a 10-year forecast for a wide range of asset classes, ranging from municipal bonds to mortgage-backed securities. (2)
According to Vanguard, the U.S. stock market is expected to deliver an annualized return of between 3.3% to 5.3% over the next 10 years. That is considerably lower than the previous 10 years. Since 2015, the S&P 500 has delivered an annualized return of 15.26%. (3)
The team’s forecast about so-called ‘growth stocks’ is even worse. Vanguard expects an annualized return between 1.9% and 3.9% over the next 10 years. That’s uncomfortably close to the 4% withdrawal rate many retirees depend on to meet living expenses.
If you’re already retired or approaching retirement and your portfolio is overweight U.S. stocks, these forecasts should cause some concern.
Not all asset classes are facing a bleak decade. In fact, some could outperform. Vanguard’s forecast suggests that U.S. treasury bonds could deliver annualized returns ranging from 3.8% to 4.8% over the next 10 years. That’s better returns than growth stocks with far less volatility and risk.
The firm also expects to see stock markets in developed countries outside the U.S. outperforming. Developed market equities excluding American stocks are expected to deliver 5.7% to 7.7% annualized by 2035.
If Vanguard is correct about future US returns; that means retirement savings investment will have to be increased or altered to other investment segments. And for those retired; a gut check on spending might be in order.
It may be, but 15 seconds of googling will give you their more recent forecast - which is infinitely more relevant.
Edit: Looks like there is also a June update:
Footnote: In my experience, these forecasts are always very conservative. My own firm has never once forecast 10 year equity returns to be near much less above the historical average, yet that is what the market has done for the last 10 years.
Google tells us the median earning growth rate of the S&P 500 is 10.8%. So Vanguard must be including all those mom & pop businesses that struggle to make a profit. Not what most of us invest in.
In normal times, median PE of the S&P is 16. Implying 16% earnings growth for the ideal peg ratio of 1.0. Hence the question. Implied normal peg ratio of the S&P is 1.5.
Over the last 10 years the S&P has averaged 15.2% per year (with dividends reinvested).
It is logical that a period of above average returns will be followed by a period of below average returns. Assuming the stock market returns to the average, of course.
But there does seem to be some sort natural law that overall it is tough business to grow profits by more than about 10% a year on average. Obviously, some do it, but many don’t.
If Vanguard was expecting 3.3% to 5.3% over the next 10 years from Oct 2025 … and the market rose 10.7% since then, are they now expecting 2.2% to 4.2% over the next ~9 years? If not, then their estimation last year was worthless, and why would any new estimation be worth anything more?
Yes. It sounds like they are factoring in a large market drop sometime in the next decade (as are many on this board). Those drops (particularly multi-year ones) can put a big dent in long-term returns.
