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The investment chief at Vanguard says it''s time to pivot away from U.S. stocks

Vanguard's Investment Chief Warns: Time to Shift Gears from Overheated U.S. Stocks to Global Opportunities

In a bold call that could reshape portfolios for millions of investors, the chief investment officer at Vanguard, the asset management behemoth overseeing roughly $10 trillion in global assets, has issued a stark recommendation: it's time to pivot away from U.S. stocks. This advice comes amid growing concerns over sky-high valuations in the American market, which have been propelled by years of tech-driven gains, low interest rates, and economic stimulus. According to the CIO, whose insights carry significant weight given Vanguard's status as one of the world's largest investment firms, clinging to U.S. equities could lead to underwhelming returns in the coming years, while international markets present more attractive opportunities for growth and diversification.

The pronouncement was made in Vanguard's latest economic and market outlook report, a quarterly deep dive that analyzes global trends and provides forward-looking guidance. The CIO emphasized that the U.S. stock market, particularly the S&P 500, has enjoyed an extraordinary run, with returns averaging well above historical norms over the past decade. However, this success has come at a cost: valuations are now stretched to levels not seen since the dot-com bubble of the early 2000s. Metrics like the cyclically adjusted price-to-earnings (CAPE) ratio, popularized by economist Robert Shiller, currently hover around 35 for the U.S. market—far exceeding the long-term average of about 17. This elevated CAPE suggests that future returns could be muted, potentially in the range of 4% to 6% annually over the next decade, compared to the 10% or more that investors have grown accustomed to.

Driving this assessment is a confluence of economic factors. The Federal Reserve's aggressive rate-hiking cycle, aimed at taming inflation that peaked at over 9% in 2022, has begun to cool the economy. While inflation has moderated to around 3%, the lagged effects of higher borrowing costs are expected to weigh on corporate profits and consumer spending. Moreover, the U.S. faces headwinds from geopolitical tensions, including ongoing trade disputes with China and instability in Europe due to the Russia-Ukraine conflict. These uncertainties could exacerbate volatility in domestic stocks, making them less appealing relative to their international counterparts.

In contrast, the CIO highlighted the undervalued nature of non-U.S. markets. European equities, for instance, trade at CAPE ratios closer to 20, offering a more reasonable entry point. Emerging markets, including powerhouses like India and Brazil, are poised for stronger growth driven by demographic advantages, such as younger populations and expanding middle classes. Even in developed Asia, stocks in Japan and South Korea are benefiting from structural reforms and a rebound in manufacturing. The CIO pointed to Vanguard's proprietary models, which forecast annualized returns of 6% to 8% for international developed markets and 7% to 9% for emerging markets over the next 10 years—figures that outpace the subdued expectations for the U.S.

This pivot isn't just about chasing higher returns; it's also a call for better diversification. Vanguard has long championed the benefits of broad market exposure through low-cost index funds, and the CIO reiterated that over-reliance on U.S. stocks exposes investors to concentrated risks. For example, the "Magnificent Seven" tech giants—Apple, Microsoft, Nvidia, Amazon, Meta, Alphabet, and Tesla—now account for nearly 30% of the S&P 500's market capitalization. While these companies have driven much of the recent bull market, their dominance creates vulnerability to sector-specific shocks, such as regulatory scrutiny on AI or supply chain disruptions in semiconductors. By allocating more to international assets, investors can mitigate these risks and tap into a wider array of industries, from European luxury goods to Asian renewables.

The recommendation aligns with broader shifts in the investment landscape. As interest rates stabilize at higher levels than the zero-bound era of the 2010s, fixed-income investments like bonds are regaining appeal. The CIO noted that U.S. Treasury yields, currently around 4% for the 10-year note, provide a safer alternative to equities, especially if a recession materializes. Vanguard's outlook anticipates a "soft landing" for the U.S. economy, with GDP growth slowing to 1.5% in 2025, but acknowledges the possibility of a downturn if labor markets weaken further. In such a scenario, international diversification could act as a buffer, as regions like Asia may decouple from U.S. economic cycles.

Critics might argue that international stocks have underperformed U.S. ones for years, a trend often attributed to the dollar's strength and America's innovation edge. The CIO addressed this head-on, acknowledging the "home bias" that leads many American investors to favor domestic assets. However, historical data shows that periods of U.S. outperformance are often followed by international rebounds. For instance, in the 2000s, after the tech bubble burst, non-U.S. stocks outperformed significantly. Vanguard's analysis suggests we're at a similar inflection point, with currency dynamics shifting as the dollar potentially weakens against the euro and yen amid diverging monetary policies.

For practical implementation, the CIO advised a gradual rebalancing rather than a wholesale sell-off. Investors in Vanguard's target-date funds or balanced portfolios might already see automatic adjustments, as these products incorporate global allocations. For do-it-yourself investors, increasing exposure to funds like the Vanguard Total International Stock ETF (VXUS) or the Vanguard FTSE All-World ex-US ETF (VEU) could be straightforward steps. The emphasis is on long-term discipline, avoiding knee-jerk reactions to short-term market noise.

This isn't the first time Vanguard has sounded alarms on valuations. Back in 2021, amid the post-pandemic rally, the firm cautioned about frothy markets, a view that proved prescient during the 2022 bear market. Now, with the S&P 500 up over 20% year-to-date in 2025, driven by AI enthusiasm, the CIO's message is clear: complacency could be costly. Instead, embracing a global perspective might not only enhance returns but also build more resilient portfolios.

Looking ahead, Vanguard's outlook extends beyond equities. In fixed income, the firm sees value in high-quality corporate bonds and emerging market debt, where yields compensate for risks. Commodities, particularly those tied to the green energy transition like copper and lithium, could also play a role in diversified strategies. The CIO stressed the importance of inflation protection, given persistent pressures from supply chain realignments and climate-related disruptions.

Ultimately, this pivot recommendation underscores a fundamental investing truth: markets are cyclical, and what goes up must eventually moderate. By heeding Vanguard's advice, investors can position themselves to weather potential storms in the U.S. while capitalizing on undervalued opportunities abroad. As the global economy evolves, with shifting trade patterns and technological advancements, a U.S.-centric approach may no longer suffice. The CIO's call to action serves as a timely reminder that true diversification is key to long-term success in an increasingly interconnected world.

In wrapping up the outlook, the CIO expressed optimism about the overall investment environment, noting that while challenges abound, the potential for reasonable returns persists for those who adapt. Vanguard, with its investor-owned structure and focus on low fees, continues to advocate for evidence-based strategies over speculation. This latest guidance reinforces that ethos, urging a strategic shift that could define portfolio performance for years to come. (Word count: 1,048)

Read the Full Fortune Article at:
[ https://fortune.com/2025/07/24/the-investment-chief-at-10-trillion-giant-vanguard-says-its-time-to-pivot-away-from-u-s-stocks/ ]