Vanguard analysts unveil 2025 inflation, economy, and stocks forecast
Rob Lenihan
5 min read
Since humans started walking upright, they've wanted to know what's coming next.
Whether it's astrology, tarot cards, Ouija boards, tea leaves, crystal balls, or Paul the Octopus predicting the World Cup, people need to know the future, and they need to know right now.
As we move into 2025, economists are trying to gauge what might happen over the next 12 months.
Unquestionably, one of the year's biggest events — perhaps the biggest — is set to kick off on Jan. 20 when Donald Trump returns to the White House for a second term.
"Drawing on the history of Trump's first term, an even-handed assessment of the four pillars of Trump's current economic platform — higher tariffs and tough anti-China policies; extending the 2017 tax cuts; deregulation and increasing government efficiency; and deporting immigrants — suggests that there will be offsetting pluses and minuses," the Hoover Institution said in a December report.
The Washington D.C.-based research center said the net economic impacts are most likely somewhere in between the most pessimistic prognostications and the rosy scenario envisioned by the Trump team, adding that "there are many key uncertainties and risks."
Trump’s team is finalizing an aggressive slate of immigration executive orders that are expected to be released only hours after the president-elect is sworn in, CNN reported.
All this has Wall Street revamping models, crunching numbers, and prognosticating feveriously, including Vanguard's research team.
U.S.President-elect Donald Trump will return to the White House. (Photo by Scott Olson/Getty Images)Scott Olson/Getty Images
What's next for the U.S. depends on the White House
The planning includes US Immigration and Customs Enforcement sweeps in major metropolitan areas, sending more Pentagon resources to the US southern border, placing additional restrictions on who is eligible to enter the US, and rolling back Biden-era policies, CNN said, citing two sources familiar with the discussions.
"The market is already reacting to a Bloomberg report that Trump will announce that cryptocurrency is a "national priority," said analyst James "Rev Shark" DePorre in a post on TheStreet Pro. "Bitcoin (IBIT) has moved back over the key $100,000 level on that news, and miners are rallying as well."
DePorre said the big question about Trump’s first day in office will be priorities.
"We know that tariffs will be a key issue for the market," he added. "But there is very little clarity about how the new administration will proceed. While there will be much talk about tax policy, immigration, and other issues, so far there is very little clarity about what initial moves will be made."
Vanguard issues its 2025 markets forecast
Analysts at Vanguard have been looking to 2025 and beyond to gauge the future.
A recent study by the financial services company, one of the largest on the planet, predicts that the global monetary easing cycle will be in full swing this year, with inflation in most developed economies now within touching distance of central banks’ targets.
"The good fortune of high productivity growth and a surge in available labor has propelled the U.S. economy, while other economies have been less lucky," the report said.
"The potential for these positive supply-side factors to wane is a key risk to our U.S. outlook, though expansionary fiscal policy may cushion any negative impact on growth," Vanguard added.
Artificial intelligence was the Thing of all things in 2024, with AI chipmaking monster Nvidia (NVDA) weighing as the Dow's top performer last year.
While all the hullabaloo surrounding AI and its world-changing potential is warranted, Vanguard said widespread adoption won't happen overnight.
"While we expect AI adoption to be relatively quicker than previous innovations (a common trait of digital technologies), significant productivity growth from AI utilization likely wouldn’t occur until the late 2020s, even in our most optimistic scenario," the firm said.
Vanguard noted that the Federal Reserve began easing interest rates for the first time this cycle at its September 2024 meeting, acknowledging the progress toward restoring price stability.
"Indeed, the U.S. economy has achieved a favorable balance of strong GDP growth, low unemployment, and cooling inflation," the firm said. "We attribute this confluence to recent supply dynamics—labor force and productivity growth—that have shaped the economic landscape over the past two years."
Vanguard said that going forward, these conditions and a shifting policy environment will require the Fed to recalibrate its current expectations about how far it needs to or can ease policy rates.
"We anticipate that growth momentum will remain solid in 2025, supported by less restrictive monetary policy as well as ongoing productivity tailwinds that have increased our estimate of potential growth," the report said. "We forecast GDP growth of 2.1%, reflecting a modest drag from potential changes to trade and immigration policies."
Vanguard expects core inflation to remain near 2.5% in 2025, above the Fed’s 2% target, due to strong economic momentum and potentially inflationary effects from new immigration and trade policies.
In response, the Fed will have to adjust to those policies and recalibrate to the likelihood that a neutral policy rate is above its currently assumed 2.9%.
“We expect a more cautious reaction in 2025, with the policy rate remaining at or above 4% by year-end," the firm said.
Vanguard said that if economic growth and earnings hold up, U.S. equities could sustain elevated valuations.
Vanguard reveals 10-year stock market outlook
However, the firm added, as the horizon extends, growth and earnings impacts diminish, with valuations eventually dominating returns as a “fundamental gravity.”
"For these reasons, our 10-year outlook leans toward the U.S. underperforming international markets," Vanguard said. "However, there remains a 30% probability that the U.S. could still outperform over the long term, but by a narrower margin than in recent years."
Looking ahead, the report said that the challenge is that regions with the most attractive valuations are also most exposed to economic policy risks.
Emerging markets and Europe have low valuations but are particularly vulnerable to U.S. trade policy.
"A tug-of-war between tax cuts and tariffs will be key to reconciling near-term U.S. equity earnings," Vanguard said. This policy tension raises the prospect of an adverse economic development that may expose the current overvaluation of U.S. equities."
