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In a preview of its upcoming economic and market outlook, asset manager Vanguard offered its long term take on the market landscape heading into 2026.

In its overview of capital markets, Vanguard experts outlined three types of investment that have the strongest risk-return profiles over the next five to 10 years. And despite the powerful megatrend that is AI – technology stocks are not on the list.

While technology could maintain their momentum in 2026 due to the rate of investment and anticipated earnings growth, there are longer term risks, according to Vanguard.

Risks are growing amid this exuberance, even if it appears “rational” by some metrics. More compelling investment opportunities are emerging elsewhere even for those investors most bullish on AI’s prospects. Our conviction in this view is growing, and it parallels investment returns in previous technology cycles,” stated Joe Davis, Vanguard’s global chief economist in the preview.

Instead, Vanguard says the best investments in the coming five to 10 years are:

• High-quality U.S. fixed income.
• U.S. value-oriented equities.
• Non-U.S. developed markets equities.

High-quality bonds, according to Vanguard, should offer robust real returns that are comfortably over the rate of expected future inflation and provide diversification. The other two — value and international stocks — should be fueled by AI.

The expanding scope of AI

Vanguard has muted expectations for U.S. growth and tech stocks, which have been the dominant force over the past 10 to 15 years. But, at the same time, Vanguard is bullish on the transformative prospects of AI.

The heady expectations for U.S. 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. Volatility in this sector—and hence the U.S. stock market overall— is very likely to increase,” Davis wrote in the preview.

Vanguard is forecasting an average return of 4% to 5% for U.S. stock over the next five to 10 years. That muted forecast is almost entirely driven by its risk-return assessment of large-cap technology companies. But other areas, particularly value stocks and international stocks, will likely pick up the slack, driven by the continued adoption of AI.

“Both U.S. value-oriented and non-U.S. developed markets equities should benefit most over time as AI’s eventual boost to growth broadens to consumers of AI technology,” Davis wrote. “Economic transformations are often accompanied by such equity market shifts over the full technology cycle.”

Davis concludes by noting that these three investment opportunities – high quality bonds, value stocks, and international stocks — are both “offensive and defensive.” This means that they should benefit in any scenario, be it an AI boom or a slower-growth or recessionary environment.

“This risk assessment holds no matter whether today’s AI exuberance ultimately proves rational or not,” Davis wrote.

Vanguard’s full economic and market outlook is slated to come out in mid-December.

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