Investor Pulse: Stable outlook sustains optimism in August

In August, investors expected stocks to return 5.5% over the coming 12 months, the same reading as in June. Recent short-term return expectations remained significantly above the October 2022 low of 0.6% and 1 percentage point above our survey’s historical average. Expected returns for the long run (defined as the next 10 years) were also steady at 7.1%.

“Although this year’s market rally paused in August, investor expectations remain elevated as summer comes to a close,” said Xiao Xu, an analyst in Vanguard Investment Strategy Group.

Investors’ expectations for average annual GDP growth over the coming three years held steady at 3.1%, but the outlook for the coming decade dipped slightly to 3.7%.

“Growth expectations have stabilized with the economy managing to grow slightly above trend in the first half of the year despite aggressive interest rate hikes by the Federal Reserve,” said Rhea Thomas, a Vanguard economist. “Consumer spending, the key driver of GDP growth, has held up given that job creation and wage growth have only recently begun to show signs of moderating.”   

In August, investors believed there was a 5.1% chance that the stock market would drop by 30% or more over the coming 12 months. That matched the reading for June and was 0.4 percentage points lower than our survey’s historical average.

Investors cut the odds of an economic disaster for the second time in a row: The average stood at 5.4% in August, compared with 6% in June and 6.4% in April. 

Stock market return expectations by gender for the coming 12 months have changed in unanticipated ways over the six-year history of our survey, particularly in the context of pandemic-related market dynamics.

Before April 2020, investor expectations by gender were similar. After the historic stock market crash in March 2020, however, women grew significantly more pessimistic about the near-term outlook. At that time, their stock market return expectations for the coming 12 months dropped by nearly 4 percentage points (from 4.9% to 1.0%), while men’s expectations dropped by only 2.3 percentage points (4.9% to 2.6%), which opened a significant gender gap in optimism.

Since then, however, women’s return expectations have rebounded and now average 0.3 percentage points higher than men’s. In addition, women are more optimistic about the long-term outlook for both the stock market and the economy.

“Women’s expectations seem more responsive to market conditions than men’s, reaching lower lows in April 2020 but higher highs since then,” said Andy Reed, head of investor behavior research at Vanguard. “Those divergences in expectations by gender are consistent with evidence that women suffered more financial harm from COVID-19 and with research on broader gender differences in risk tolerance. Women’s post-pandemic rebound in expectations may be a sign of greater optimism moving forward.”

Vanguard’s Investor Research & Insights team has been collecting Vanguard investor expectations for U.S. stock market returns and U.S. GDP growth since February 2017. The survey runs every other month, in February, April, June, August, October, and December. A special survey was conducted in March 2020 during the pandemic-induced market crash.

The survey poses 13 brief questions about U.S. stock market and economic growth expectations to a random sample of 2,000 Vanguard personal and 401(k) investors. It is conducted in partnership with academic researchers Stefano Giglio of the Yale School of Management, Matteo Maggiori of the Graduate School of Business, Stanford University, and Johannes Stroebel of the Stern School of Business, New York University.

The survey respondents are a random sample of U.S.-based Vanguard investors invited by email to participate. About 80% of the sample is drawn from our personal investor clients and about 20% from participants in employer-sponsored defined contribution retirement plans. To be included, investors also must have opted in to receive Vanguard statements by email, be over age 21, and have total Vanguard assets of at least $10,000. Overall, this sample group holds about $2 trillion in assets at Vanguard. We receive about 2,000 responses from investors in each period the survey is conducted.

The responses may be of use to advisors, plan sponsors, researchers, and other investors wishing to gauge current sentiment among individual households and calibrate clients’ thoughts compared with the market.

• Labor market pulse: Signs of softening in hiring data (article, issued August 2023)
• Bloomberg podcast features Vanguard’s CIO (58:19 podcast, issued August 2023)
• Vanguard’s perspective on China’s challenging economy (article, issued August 2023)
• Investor Pulse: Many expect strong returns to continue (article, issued July 2023)