Vanguard Warns U.S. Stocks Face 4.8% Returns Due to Overvaluation and Waning Growth

Vanguard Group’s president and chief investment officer, Greg Davis, has issued a stark warning to investors, urging a strategic pivot away from U.S. equities amid concerns over overvaluation and waning growth potential. In a recent interview with Fortune, Davis emphasized that the U.S. stock market has become a “victim of its own success,” with returns projected to plummet from a 12.4% annualized average over the past decade to a mere 3.8%–5.8% range (midpoint of 4.8%) in the next ten years [1]. This assessment challenges the prevailing optimism among Wall Street analysts and media commentators, who continue to tout U.S. stocks as a top-performing asset class despite years of robust gains [1].

Davis’ critique hinges on two key metrics: the S&P 500’s current price-to-earnings (P/E) ratio of 29.3 and its cyclically adjusted P/E (CAPE) ratio, which exceeds fair value by 49% [1]. He argues that the market’s exorbitant valuations, coupled with historically high corporate profits that have already peaked, will stifle future earnings growth. “Corporate profits can’t keep rising at the same rate,” Davis stated, noting that S&P 500 earnings per share (EPS) growth from Q4 2021 to Q1 2025 averaged just 9.6% annually, far below inflation rates [1]. These factors, he contends, create a structural drag on returns, making U.S. equities a riskier bet for long-term investors.

The investment chief also highlighted the unintended consequences of the prolonged bull market on portfolio allocations. The traditional 60-40 stock-bond split, long a staple of asset allocation strategies, has skewed heavily toward equities due to underperformance in fixed income. Davis explained that investors who avoided rebalancing over the past decade now hold portfolios leaning 80% toward U.S. stocks, with foreign equities and bonds disproportionately underrepresented [1]. To counter this imbalance, he advocates a radical shift: 60% bonds, 20% U.S. equities, and 20% international equities. This reallocation, he argues, would yield comparable returns (projected at ~5% annually) with significantly reduced volatility compared to maintaining an overconcentrated U.S. equity position [1].

Vanguard’s recommendation underscores its commitment to a low-cost, data-driven investment philosophy rooted in its founder John Bogle’s legacy. The firm’s index funds, which now manage 28% of the U.S. mutual fund and ETF market, have consistently outperformed peers due to their minimal expense ratios [1]. Davis reiterated Vanguard’s belief in periodic rebalancing, emphasizing that investors should “shift from securities that get extremely pricey by historical standards into areas that are undervalued.” This approach aligns with the firm’s broader strategy of prioritizing diversification and cost efficiency, even as it diverges from the high-growth narratives dominating financial media [1].

Notably, Davis dismissed cryptocurrencies as speculative assets ill-suited for core portfolios. While acknowledging blockchain’s potential to enhance financial infrastructure, he stressed that Bitcoin offers no cash flow or yield-generating mechanisms, likening it to “selling to someone willing to pay more.” Vanguard has no plans to launch a Bitcoin fund, reflecting the firm’s cautious stance on unregulated digital assets [1].

The interview also provided insights into Davis’ personal background, including his upbringing on a U.S. Army base in Germany and his career trajectory from Penn State’s insurance program to Vanguard’s leadership. His decision to join Vanguard in 1998 was driven by the firm’s cooperative ownership model, which aligns with its mission to rebalance excess returns toward investors via fee reductions. In 2024, Vanguard announced a $350 million fee cut across 68 funds, further reinforcing its commitment to cost discipline [1].

Davis’ comments have sparked debate within the financial community, particularly regarding the feasibility of his proposed 60% bond allocation. With yields on three-month Treasuries near 4.3%, such a shift could provide a stable return floor, but critics argue it risks underperformance in a low-interest-rate environment. Nonetheless, Vanguard’s analysis suggests that a diversified, low-volatility portfolio may offer a more sustainable path in an era of market uncertainty [1].

Source: [1] [title1: The investment chief at $10 trillion giant Vanguard says it’s time to pivot away from U.S. stocks] [url1: https://fortune.com/2025/07/24/the-investment-chief-at-10-trillion-giant-vanguard-says-its-time-to-pivot-away-from-u-s-stocks/]