If your retirement account balance has swelled in the past couple of years, you are not alone.
Taken together, 2023 and 2024 represent the best back-to-back years for the S&P 500 stock market index since the late 1990s.
But as you celebrate your good fortune this New Year’s holiday and dream of even bigger gains in 2025, Vanguard Investments offers a sobering prediction: The party might be about to end.
Using its Vanguard Capital Markets Model, the company is predicting an annualized nominal return of just 2.8% to 4.8% for U.S. stocks over the next 10 years.
That is well below the long-term stock market average and even lags Vanguard’s forecast for U.S. aggregate bond returns, which the company pegs at between 4.3% and 5.3%.
Vanguard acknowledges that “more extreme returns are possible.” Still, its forecast is unlikely to please investors who saw the S&P rise 26.06% in 2023 and who are looking at a gain of a similar size in 2024.
Vanguard believes U.S. equity valuations today are “elevated,” although “not as stretched as traditional metrics imply.”
The company notes that U.S. markets could be in a period like the mid-1990s, when stocks were in the middle of a massive and sustained rise. Or — more ominously — stocks could be in a position similar to 1999, when returns were about to fall into a three-year tailspin.
Vanguard concludes:
“Ultimately, high starting valuations will drag long-term returns down. 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.”
Before you panic, it’s important to note that predictions — from Vanguard or anyone else — often fall well short of the mark.
However, if you have faith in Vanguard’s soothsayers, you might want to consider taking a second look at stocks outside the U.S. Vanguard says international valuations “are more attractive” and predicts that global stocks outside the U.S. will perform better over the next decade, logging returns of between 6.9% and 8.9%.
If 2025 is going to be the year you get serious about investing, check out “How to Start Investing — No Matter How Much Money You Have.”
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