Investor expectations for equities at highest in two years, Vanguard reveals

Interest rates and potential recession are not enough to weaken confidence.

Investors have turned more optimistic about the equities market with expectations for returns at their highest for two years, according to Vanguard.

The firm’s research conducted in December reveals that investors expect returns of 5.7% over the next 12 months, up 1.3 percentage points from the previous Vanguard Expectations Survey in October and more than double what respondents to the December 2022 survey were predicting for 2023 (2.7%).

The increased bullishness comes despite interest rates remaining high for now and the potential for a U.S. recession.

Looking at the long-term outlook for equities, investors taking part in the poll expect returns of 7.2% over the next 10 years, higher than Vanguard’s forecast in the range of 4.2% to 6.2%.

The chance of a correction of at least 30% for the stock market over the next 12 months has lowered according to the survey’s participants, falling 0.7 percentage points month-over-month to 5.3%. The odds of an economic disaster in 2024 also fell, by 0.5 percentage points to 5.4%.

“Investor concerns about market and economic disasters are largely in the rearview mirror,” said Andy Reed, head of investment behavior research at Vanguard. “Fresh memories of 2023’s bull market and resilient economy are keeping investors’ spirits high as we return to sound money in 2024. Investor sentiment seems to be turning back the clock to pre-pandemic times.”

ECONOMIC OUTLOOK

Respondents believe that the U.S. economy will be buoyant over the next three years with expectation of GDP growth of 3.5%. This metric grew sharply in December to the highest in the survey’s history.

“Investors expect the economy to consistently improve in the next few years,” said Xiao Xu, an analyst in Vanguard Investment Strategy Group. “Economic optimism has reached levels not seen since February 2022, buoyed by economic outperformance in 2023.”

Real GDP increased at an annual rate of 3.3% in the fourth quarter of 2023 according to the “advance” estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 4.9%.