Vanguard: U.S. Stocks May Be Too Expensive in 2025

U.S. stock market investors could face tough choices in 2025 as stock prices may be climbing too high compared to their actual worth, according to Vanguard’s latest economic and market outlook report.

This warning comes as investors try to determine whether today’s high stock prices make sense given company performance and profits, or if the market is showing signs of a bubble similar to the dot-com era of 1999.

The report finds that while U.S. stock prices are high, they are not as overpriced as some traditional measurements suggest. When factoring in the market’s concentration in big tech companies and their ability to borrow money cheaply, stocks are about 25% above their fair value.

“Assets with the strongest fundamentals have the most stretched valuations, and vice versa,” according to the report, meaning the companies with the best business performance may have the most inflated stock prices.

What Could Happen Next

Vanguard sees three possible scenarios for U.S. stocks in 2025. In the best case, a surge in worker productivity similar to the mid-1990s could justify current high prices of large companies and fast growing stocks.

Another possibility, according to the report, is that lower interest rates could help spread gains to smaller companies and value stocks—those considered underpriced relative to their actual business strength and profits.

However, the report warns current conditions might mirror 1999, when an economic downturn exposed inflated stock prices, leading to large market declines.

The outlook is brighter for bonds, according to the report. Higher interest rates have improved potential returns, with Vanguard expecting 4.3% to 5.3% annual returns for both U.S. and international bonds over the next decade.

U.S. bond yields should stay above 4%, creating what Vanguard calls a “coupon wall,” meaning regular interest payments provide a cushion against potential price declines.

International stocks look more attractively priced than U.S. shares, though these markets face greater risk from global economic uncertainty and policy changes, the report suggests.

For emerging markets, Vanguard expects company earnings to grow just 2.2% over the next decade—much lower than the 7.2% average seen over the past 20 years.

“The likelihood that we are in the midst of a valuation-supporting productivity boom, akin to the mid-1990s, must be balanced with the possibility that the current environment may be more analogous to 1999,” the report states.