Vanguard has identified two key areas within the stock market that it favors over the next five to ten years, diverging from the tech sector that has dominated recent investments, particularly amidst the rise of artificial intelligence (AI). The asset management giant, which manages a portfolio worth $11.9 trillion, highlighted in its 2026 outlook report that value stocks and non-U.S. developed market stocks present the most compelling investment opportunities when considering risks versus potential rewards.
According to Vanguard, U.S. value stocks are projected to yield an annual return of approximately 7% over the next decade, while non-U.S. developed market stocks are expected to deliver around 6% per year. Although these sectors may not directly align with AI investments, Vanguard noted that they stand to gain indirectly from the broader economic impacts of AI in the coming years. The report emphasized that both value stocks and non-U.S. developed markets currently offer more attractive valuations and have yet to fully incorporate the potential long-term advantages of AI adoption into their pricing models.
As AI technology seeps into various economic sectors, Vanguard suggests that value-oriented industries—such as industrials, financials, and select consumer segments—might be better positioned for efficiency gains and earnings growth in the medium term. The firm also pointed out that these sectors could serve as protective investments if there were to be a sudden downturn in the tech market.
Recent market movements indicate a shift towards value and non-U.S. stocks. For instance, over the past month, the Vanguard S&P 500 Value ETF (VOOV) and the Vanguard Tax Managed Fund FTSE Developed Markets ETF (VEA) have risen by 2.7% and 1.6%, respectively, while the Vanguard Information Technology Index Fund ETF (VGT) has seen a decline of 1.4%. Non-U.S. developed market stocks, which encompass countries such as the UK, Japan, France, Germany, Australia, South Korea, and Switzerland, have significantly outperformed U.S. stocks this year. As of 2025, the VEA has surged by 30.3%, compared to a 15% gain in the S&P 500.
While Vanguard refrained from labeling the current investment landscape as an AI bubble, it acknowledged that the AI investment cycle is only about 30%-40% of its projected peak. With that said, the firm warned that there are burgeoning risks associated with the rapid growth in technology stocks. Vanguard pointed out that as U.S. technology stocks may continue their ascent due to fraught levels of investment and anticipated earnings growth, increasing risks also loom over this sector. This includes the possibility of new competitors emerging to challenge existing AI leaders and the capital expenditure required for AI infrastructure potentially straining earnings.
For investors interested in diversifying their portfolios to include U.S. value stocks and non-U.S. developed market stocks, Vanguard recommended several options. Notable choices include the iShares Core S&P US Value ETF (IUSV) and the Schwab International Equity ETF (SCHF), in addition to the Vanguard funds previously mentioned.
