Vanguard Australia has shared its 10-year annualised forecasts for local equities and bonds, forecasting Australia to outpace both global and US peers.
In its 2026 Economic and Market Outlook, the global asset manager noted financial markets are “exuberant” right now thanks to strong fundamentals, AI investment and economic productivity.
The 10-year annualised return forecast for Australian equities now sits at 4.8 – 6.8 per cent.
This is above both US equities (unhedged) and global-ex Australia equities (unhedged) which are forecast to see 10-year annualised returns of 4.0-6.0 per cent and 4.6-6.6 per cent respectively.
It noted: “We remain most guarded in our assessment of US growth stocks. Our muted expected returns for the technology sector are entirely consistent with our more bullish prospects for an AI-led US economic boom.
“The heady expectations of US technology stocks are unlikely to be met for at least two reasons. The first is the already-high earnings expectations and the second is the typical underestimation of creative destruction from new entrants into the sector which erodes aggregate profitability. Our muted US stock return forecast of 4.0%-6.0% average returns over the next 10 years is nearly single-handedly driven by our risk-return assessment of large-cap technology companies.”
On the bonds side, Australian aggregate bonds are forecast to return 3.9-4.9 per cent on an annualised 10-year basis. As with the equities, this is higher than global ex-Australia aggregate bonds (hedged) which are forecast to return 3.7-4.7 per cent.
| Asset class | 10-year return expectations |
| Australian equities | 4.8%-6.8% |
| Global ex Australia equities (unhedged) | 4.6%-6.6% |
| US equities (unhedged) | 4.0%-6.0% |
| Australian aggregate bonds | 3.9%-4.9% |
| Global ex-Australia aggregate bonds | 3.7%-4.7% |
Source: Vanguard Australia, December 2025
Impact of AI
AI’s ability to offset economic shocks is central to Vanguard’s outlook next year. The firm sees a 60 per cent chance the US economy will achieve 3 per cent real GDP growth in coming years – well above most forecasts.
“Over the next five years, we see an 80 per cent chance that economic growth diverges from consensus expectations.
“Even at current stretched valuations, such momentum would not be unprecedented, especially if AI scalers continue to grow earnings.”
Vanguard likens today’s AI-driven investment cycle to past capital booms, including the railroad build-out and the late-1990s tech surge.
“These projections shape our investment outlook and offer somewhat unconventional – yet increasingly compelling – investment opportunities for increasingly frothy financial markets.
“As to AI’s economic impact, 2026 will see its productivity upside realised – albeit at an uneven pace across industries and economies. However, if AI progress stalls, the US risks a period of anaemic growth reminiscent of the decade following the 2008 global financial crisis.”
Adoption remains uneven globally, with the US and China leading while Europe is “behind the curve” on AI innovation.
“In Europe, investment remains concentrated in ‘old-world’ industries like automobiles and pharmaceuticals, rather than innovations for the future such as software, semiconductors, and AI.”
Its US equity forecast of 4–5 per cent annualised over five to 10 years is shaped largely by the expected risk-return profile of large-cap technology.
“The history of investing during technology cycles reveals some counterintuitive – yet increasingly compelling – investment opportunities regardless of whether AI proves transformative or not.
“However, our conviction is growing stronger that long-term prospects for US equities are subdued – around 4 to 5 per cent annualized returns over the next 10 years. Our muted long-term return projection for US equities is entirely consistent with our more bullish prospects for an AI-led US economic boom.”
Over a full technology cycle, Vanguard says, equity leadership typically shifts.
“Both US value-oriented and non-US developed markets equities should benefit most over time as AI’s eventual boost to growth broadens to consumers of AI.”
AI scalers themselves face “creative disruption”, it said.
“History suggests that the companies earning excess profits at the frontier of new technologies are unlikely to all do so in the future.
“New and nimble competitors could leverage the very infrastructure being built now to reshape the market, as seen in the ‘DeepSeek moment’ of early 2025. The ability of incumbents to transform investment into lasting advantages is far from assured, further heightening uncertainty around future returns,” the outlook said.
US value and international equities, Vanguard adds, remain essential for long-term investors and could hedge against a sudden reversal in AI-driven US growth stocks.
“Our portfolio balances the near-term momentum in the economy, uneven long-term return projections, and lessons from the history of investing during technology cycles.”
Meanwhile, China’s potential growth is expected to improve modestly.
“Productivity and human capital gains will stem from advancements in AI, broader technology investments, and continued progress in education and expanding the talent pool,” the report said. “Overcapacity concerns suggest that gains from rising investment in high-tech and strategic sectors may not fully offset the downturn in property investment.”
