Vanguard Says Flip the 60/40 Portfolio for 2026: Bonds Back, AI Risks Rising

December 25, 2025 — The classic 60/40 portfolio (60% stocks, 40% bonds) has long been the shorthand for “balanced” investing. But heading into 2026, one of the world’s most influential asset managers is pushing a noticeably different message: the next decade may reward a more bond-heavy mix—not because growth is collapsing, but because markets are pricing in a lot of good news, especially in U.S. mega-cap tech and AI.

The timing is striking. With the S&P 500 closing at a record high on Christmas Eve and investors looking ahead to 2026, the debate over whether AI enthusiasm is “the new normal” or “late-cycle froth” is no longer just a tech-stock story—it’s becoming an asset-allocation story. ^[1]

Below is what’s driving the renewed 60/40 conversation, what Vanguard is actually proposing, and what today’s headlines suggest investors are wrestling with as the calendar turns.

The new twist on 60/40: Vanguard’s “40/60” signal for the next decade

Vanguard’s updated capital markets outlook argues that long-term U.S. equity returns are likely to be subdued, even if stocks can still post strong results in the near term. In its latest Vanguard Capital Markets Model (VCMM) update, the firm says its model anticipates annualized U.S. equity returns of roughly 3.5% to 5.5% over the next 10 years, based on an October 31, 2025 model run. ^[2]

At the same time, Vanguard’s research emphasizes that bonds are back as a serious contender in the risk-and-return equation—both because yields are higher than they were during the zero-rate era and because bonds can once again serve as a stabilizer if the equity outlook turns choppy. ^[3]

This is the foundation for a more defensive tilt that has grabbed headlines across financial media: moving away from “60/40” as the default and toward something closer to 40% stocks / 60% bonds for valuation-aware investors over a 5–10 year horizon. ^[4]

What “flip the 60/40” actually means in Vanguard’s model

Importantly, Vanguard is not presenting this as a day-trading call or a short-term market-timing trick. The firm explicitly warns that:

its forecasts are probabilistic and can change with new model runs,
valuations are poor predictors in the short and even intermediate term, and
the model outputs should not be treated as “one-size-fits-all portfolio advice.” ^[5]

Instead, Vanguard frames the shift as a valuation-aware, time-varying allocation—a model portfolio designed to optimize expected risk-adjusted returns over the coming decade, not to chase next quarter’s momentum. ^[6]

In Vanguard’s 2026 outlook PDF, the firm lays out a specific example of that positioning: a time-varying asset allocation that totals 40% equities and 60% fixed income, broken down across major building blocks. The allocation shown includes:

Equities (40%)

15% U.S. value factor
6% U.S. growth factor
5% U.S. small factor
2% emerging markets equities
12% developed markets ex-U.S. equities

Fixed income (60%)

27% U.S. aggregate bonds
2% short-term U.S. Treasury bonds
5% long-term U.S. Treasury bonds
2% U.S. intermediate credit bonds
24% international bonds

That same exhibit contrasts the above with a benchmark “global 60/40” mix of 36% U.S. equities, 24% international equities, 28% U.S. bonds, and 12% international bonds. ^[7]

This is a crucial nuance: the “flip” isn’t just “buy more bonds.” It’s also a style and geography statement, pulling equity exposure toward value, smaller companies, and developed ex-U.S. markets rather than concentrating in the most expensive parts of U.S. growth.

Why Vanguard is making the call now: AI enthusiasm is doing two things at once

One of the more interesting threads in Vanguard’s outlook is that it does not deny AI’s economic potential—and in fact leans into it—while still warning that the stock-market payoff may not match the economic payoff.

In its 2026 outlook for advisors, Vanguard writes that the ongoing wave of AI-driven investment could be powerful enough to support a faster-growth regime, projecting a 60% chance the U.S. economy achieves 3% real GDP growth in coming years, while placing its 2026 growth expectation around 2.25%. ^[8]

So what’s the problem?

Vanguard’s core argument is that a booming investment cycle can still create equity-market disappointment if today’s prices already assume flawless execution. The firm points to two long-run pressures on “AI scaler” mega-cap tech leadership:

High earnings expectations already embedded in prices, and
“Creative destruction” risk, where new entrants eventually erode excess profitability. ^[9]

In the PDF outlook, Vanguard also argues that the economics of AI infrastructure spending are uncertain—even suggesting that the net present value of AI investment, in aggregate, is far from guaranteed and could be negative under some assumptions, especially if capital spending and scarce inputs compress margins. ^[10]

That is how you get the headline tension: AI can lift growth and productivity and still produce a tougher decade for stock returns if valuations and competition do the heavy lifting on the downside.

The valuation backdrop: elevated U.S. equity pricing, with pockets of value

Vanguard’s valuation dashboard is blunt on the starting point: U.S. equity valuations remained elevated as of October 31, 2025, and the most attractive relative valuations were in small-cap and value. ^[11]

It also notes that some bond sub-asset classes look “stretched,” but that global ex-U.S. aggregate bonds and long-term U.S. Treasuries remained fairly valued in its framework. ^[12]

Two takeaways matter for investors reading this on December 25:

Vanguard is not calling for “sell all stocks.” It is calling for selectivity and humility about what’s already priced in. ^[13]
The “flip” is as much about where within stocks (value, smaller companies, non-U.S. developed) as it is about how much in stocks. ^[14]

Bonds are back: the “high neutral rate” and income that competes with equities

The bond case in Vanguard’s outlook hinges on a macro concept that has reshaped markets since the inflation shock: a higher neutral policy rate.

Vanguard says still-sticky inflation (remaining above 2% in its projections) limits how far the Federal Reserve can cut, stating it expects limited scope to cut below an estimated neutral rate of 3.5% and describing its Fed view as somewhat more hawkish than market expectations. ^[15]

That matters because higher-for-longer policy rates tend to support higher bond yields, which in turn makes bond income more meaningful in total-return terms.

Vanguard’s advisor outlook puts it plainly: high-quality bonds should offer compelling real returns, projecting returns on high-quality U.S. bonds around 4% over the coming decade, roughly in line with current portfolio income levels and comfortably above expected inflation in their framework. ^[16]

This is a major reason the “60/40 is dead” narrative has faded: the problem with bonds wasn’t diversification in theory—it was that yields were too low for too long, leaving little cushion when rates surged. Vanguard’s stance suggests that cushion has returned, even if rate volatility doesn’t disappear. ^[17]

The AI bubble question: why today’s market feels both strong and fragile

Even as Vanguard urges more caution over a 5–10 year window, it acknowledges something investors can feel in real time: momentum can persist, especially when capital spending and earnings growth are strong.

That duality is showing up across year-end market coverage. An Investopedia report published today says Wall Street analysts are cautiously optimistic for 2026, projecting the S&P 500 could rise about 5% in 2026, while also warning that risks are growing, particularly in overheated tech and AI segments. ^[18]

At the same time, Reuters reported that the S&P 500 set a record closing high on December 24, 2025, with investors weighing economic data and rate expectations into year-end positioning. ^[19]

Put those together and you get the market’s Christmas-week paradox:

Near-term: optimism is still driving equity pricing, and AI investment remains a powerful narrative.
Medium-to-long term: the higher the expectations, the harder it becomes for the largest, most-owned names to keep beating them.

Vanguard’s own scenario framework captures this tug-of-war by laying out a probability-weighted view of U.S. equity return outcomes tied to AI paths—ranging from strong upside (8%–10% annualized under a high-success scenario) to a downside scenario (–2% to 2%), with an overall probability-weighted expectation that helps explain why Vanguard stays guarded even while recognizing the upside case. ^[20]

What this means for investors building a 2026 plan

A major reason this story resonates right now is that it hits three investor pain points at once:

1) The 60/40 portfolio is being questioned again—this time for the opposite reason

In 2022, the fear was “stocks and bonds can fall together.”
In late 2025, the fear is “stocks may be priced for perfection, while bonds finally pay you again.”

Vanguard’s message is essentially: when the expected return gap between stocks and high-quality bonds narrows, risk matters more. ^[21]

2) AI can transform the economy without making today’s winners unbeatable

Vanguard repeatedly emphasizes that the winners of one buildout phase are not automatically the winners of the next—and that massive capital expenditure can be a double-edged sword for margins and future shareholder returns. ^[22]

3) “Diversification” is shifting from a slogan to a practical need

The suggested model mix leans toward:

value over growth,
international developed exposure, and
high-quality fixed income as both income and defense. ^[23]

How to read the “40/60” message without turning it into market timing

For Google News readers, the most useful way to interpret this isn’t as a command to overhaul a portfolio overnight, but as a framework for asking better questions:

Time horizon check: Is your goal 5–10 years away, or 20–30? (Vanguard’s emphasis is explicitly on longer-run projections.) ^[24]
Risk budget check: If equities deliver less than in the last decade, do you still need equity-heavy exposure to meet your objectives—or can bond income do more of the work now? ^[25]
Concentration check: How much of your equity performance is effectively a bet on a handful of mega-cap tech “AI scalers”? Vanguard’s outlook suggests that this is where the long-run return compression risk is most acute. ^[26]
Diversification check: Are you diversifying across regions and styles, or are you “diversified” only in name? Vanguard’s valuation notes highlight relative opportunities in value and small caps versus the broader U.S. market. ^[27]

Vanguard itself stresses that valuation signals shouldn’t be treated as a short-term trigger and that model portfolios involve “model risk.” In other words: the point is not to predict next month—it’s to prepare for a wider range of outcomes than investors may be emotionally anchored to after a strong run. ^[28]

Key takeaways for 2026: the 60/40 debate is really about expectations

Vanguard’s long-run outlook suggests U.S. equities may deliver mid-single-digit annualized returns over the next decade, even if 2026 itself can still be strong. ^[29]
The firm’s model portfolio example leans 40% equities / 60% fixed income, with equities tilted toward value, small, and non-U.S. developed markets, and fixed income anchored by high-quality U.S. and international bonds. ^[30]
Vanguard argues AI is economically powerful but warns that the stock market payoff can be harder once expectations and competition are fully priced in. ^[31]
Today’s market narrative is split: analysts see more upside for 2026 but increasingly highlight AI-valuation and concentration risks, as the S&P 500 heads into year-end at record levels. ^[32]

As investors digest Christmas-week headlines, the practical message is less “abandon stocks” and more: rethink what “balanced” means when bonds finally offer real income again—and when the stock market’s biggest winners carry the heaviest expectations. ^[33]