Vanguard’s latest asset allocation guidance for the next decade is turning heads — and not because it’s bullish.
Earlier this week, the firm recommended a portfolio mix of 70% bonds and 30% stocks. That’s a stark shift from the long-favored 60/40 allocation and a notably more conservative stance. The reasoning is straightforward: valuations. With stocks priced at historically elevated levels, Vanguard projects that equities are likely to underperform government bonds over the next 10 years.
This perspective aligns with the cautionary tone coming from leading Wall Street strategists since last year. The argument rests on simple arithmetic: when starting valuations are high, forward returns tend to be low.
Goldman Sachs’ David Kostin underscored this point in a client note last October. His analysis suggested that the S&P 500 faces a 72% probability of underperforming bonds and a one-in-three chance of lagging inflation through 2034.
Similarly, Morgan Stanley’s Mike Wilson told Business Insider in December that his outlook for the S&P 500 over the next decade is essentially flat, with real returns potentially negative. “Given where valuations are today,” Wilson said, “returns from point A to point B will be basically flat-ish, and on a real basis, maybe negative.”
The foundation of these sober forecasts lies in the Shiller price-to-earnings (PE) ratio, which compares current stock prices to the average of inflation-adjusted earnings over the past decade. Today, the Shiller PE sits in the high 30s — territory that historically has preceded weak or negative 10-year annualized returns.
Invesco illustrated this relationship in a March analysis that tracked the Shiller PE back to 1881. Their data showed that elevated valuations have consistently translated into subdued forward performance. A more recent look, covering 1983 onward, found that starting valuations explained 78% of the S&P 500’s subsequent 10-year returns.
At today’s Shiller PE level — roughly 37, the same as in March — history suggests the next decade could deliver anything from slightly positive returns to outright declines.
The case for bonds grows stronger in this context. Vanguard projects average annual bond returns of 4–5% over the next decade. With 10-year Treasurys currently yielding around 4.2%, the risk-reward calculus becomes clear: why assume equity risk for potentially similar or worse returns than those available from government-backed securities?
High valuations imply high expectations for future earnings. When those expectations aren’t met, the market tends to reprice sharply. Even if earnings do meet lofty projections, much of that growth may already be reflected in current prices, limiting upside.
Of course, historical patterns are not ironclad rules. Structural shifts, like the widespread adoption of artificial intelligence, could alter productivity and growth trajectories in ways past data cannot capture. A meaningful pullback in valuations in the years ahead could also reset the stage for stronger forward returns.
Still, the link between starting valuations and long-term equity performance has been both strong and persistent across market cycles. For wealth advisors and RIAs building strategic plans for clients, it’s a relationship worth respecting.
Vanguard’s and Wall Street’s caution is specific to a 10-year horizon — a time frame that may have limited impact on clients with multi-decade investment horizons. For those investors, short- and intermediate-term allocation adjustments are more about managing sequence-of-returns risk and volatility than about trying to precisely forecast returns over the next decade.
That’s the key takeaway: the current guidance isn’t a call to abandon equities altogether. Rather, it’s a signal to reassess portfolio construction in light of starting valuations and available bond yields. For clients with near-term spending needs, endowments with defined disbursement schedules, or retirees drawing income, overweighting high-quality fixed income could make sense in the current environment.
Conversely, clients with long accumulation phases may still benefit from maintaining substantial equity exposure, accepting the possibility of muted near-term performance in exchange for long-term growth potential.
For advisors, the challenge is balancing these competing considerations — historical valuation signals, current yield opportunities, client risk tolerance, and investment horizon — into a cohesive plan. It’s about aligning portfolio positioning with each client’s specific goals rather than reacting reflexively to any one forecast.
As always, periods of elevated valuations test investor discipline. A conservative allocation may feel overly cautious if markets continue higher in the short term. Conversely, sticking with a growth-heavy allocation could be costly if returns stagnate or decline. This is where process and planning matter most.
Vanguard’s message, echoed by Goldman Sachs and Morgan Stanley, is ultimately about setting realistic expectations. Investors can’t control where valuations stand today, but they can control how they allocate capital in response to them. And while history doesn’t guarantee the future, it offers a statistical framework that helps advisors and clients navigate the trade-offs between risk and return.
In the current climate, that framework points toward a larger role for bonds — not as a defensive panic move, but as a rational response to the math of today’s market. Elevated equity valuations, attractive Treasury yields, and a century-plus of valuation-return data all argue for a tilt toward fixed income, at least until starting points shift to more favorable levels.
For now, the most prudent course may be to view stocks as a long-term growth engine that is temporarily running at lower capacity, and bonds as a dependable income source that is finally paying investors to wait. Strategic patience, guided by valuation awareness, could be the differentiator in delivering on client objectives over the next decade.
