II. Global capital markets outlook In our economic and market outlook for 2022, Looking ahead, our return outlook—which has we highlighted the risks global capital markets been on a steady downward trajectory since faced from the dual pressures of high equity 2009—is ticking up. This is especially true in fixed valuations and interest rates that did not reflect income, where our U.S. and international bond the seriousness of inflation pressures. As the year forecasts are more than two times higher than started, markets began to price this shift, and they were a year ago. In equities, U.S. valuations discount rates rose. Rising discount rates, coupled are more attractive than they were last year with geopolitical shocks and slowing growth, led but are still above our estimate of fair value. to a sell-off that was notable not only for its International equities, however, are at the low depth but also for its breadth and persistence. end of our fair-value estimates (Figure II-1). Although it is impossible to say with confidence when equity and bond markets will bottom, valuations and yields are clearly more attractive than they were a year ago. FIGURE II-1 Equity and bond valuations are attractive Undervalued Fairly valued Stretched 0 25 50 75 100% Valuation percentile relative to fair value 34% (57%) 44% (51%) 44% (64%) 70% (5%) Number in parenthesis lobal lobal S areate S euities is valuation as of e­€S e­€S bons September 30, 2021 euit‚ areate Notes: The U.S. valuation measure is the current cyclically adjusted price/earnings ratio (CAPE) percentile relative to fair-value CAPE for the Standard & Poor’s Composite Index from 1940 to 1957 and the S&P 500 Index from 1957 through September 30, 2022. Global ex-U.S. equity is a 70% developed markets/30% emerging markets blend. Developed-market equity valuation measures are the current CAPE percentile relative to the fair-value CAPE for the local MSCI index. The ex-U.S. developed markets valuation measure is the market-weighted average of each region’s (Australia, U.K., euro area, Japan, and Canada) valuation percentile. Emerging markets is based on the percentile rank based on our fair-value model relative to the market. U.S. aggregate bonds are the weighted average between intermediate-term credit and Treasury valuation percentiles. The global ex-U.S. aggregate valuation measure is the market-weighted average of each region’s (Australia, U.K., euro area, Japan, and Canada) valuation percentile. The valuation percentiles in parenthesis are as of one year prior. Sources: Vanguard calculations, based on Robert Shiller’s website, at aida.wss.yale.edu/~shiller/data.htm, the U.S. Bureau of Labor Statistics, the Federal Reserve Board, and Refinitiv, as of September 30, 2022, and September 30, 2021. IMPORTANT: The projections and other information generated by the VCMM regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Distribution of return outcomes from VCMM are derived from 10,000 simulations for each modeled asset class. Simulations as of September 30, 2022, and September 30, 2021. Results from the model may vary with each use and over time. Vanguard’s distinct approach to forecasting To treat the future with the deference it deserves, Vanguard has long believed that market forecasts are best viewed in a probabilistic framework. This annual publication’s primary objectives are to describe the projected long-term return distributions that contribute to strategic asset allocation decisions and to present the rationale for the ranges and probabilities of potential outcomes. This analysis discusses our global outlook from the perspective of a U.S. investor with a dollar- denominated portfolio. 37