Market valuations generally saw improvement throughout the third quarter of 2026, though the extent of this shift varied significantly across different sectors.
Equity valuations remain elevated, particularly within the United States, yet they became slightly more favorable across most broad markets and several U.S. equity factors. This trend was more evident in fixed income, where rising Treasury yields and broader credit spreads brought many sectors closer to—or further into—fairly valued territory. On the whole, fixed income continues to appear more reasonably priced than equities.
Key changes since June 30, 2026
U.S. equities: U.S. stocks remain the most expensive major asset class in our valuation framework, currently sitting at the 99th percentile relative to fair value. However, beneath the surface of the broad market, valuations have improved in several areas.
International equities: Valuations saw modest improvement across international equity markets but remain stretched. Global ex-U.S. equities shifted from the 88th to the 85th percentile, while developed ex-U.S. equities moved from the 81st to the 79th percentile. Emerging-market valuations showed a slightly more significant improvement, dropping from the 99th to the 96th percentile, though they remain high relative to estimated fair value.
U.S. equity style factors: The most notable valuation improvement was seen in small-cap stocks, which moved from the 89th to the 69th percentile. Value stocks also became more attractively priced, falling from the 70th to the 64th percentile, and they remain the least expensive of the major U.S. equity style exposures in our framework. Growth-stock valuations held steady at the 77th percentile, while large-cap valuations shifted from the 95th to the 92nd percentile.
Fixed income: Fixed income valuations improved broadly as sovereign yields climbed and credit spreads widened. U.S. aggregate bonds moved from the 57th to the 42nd percentile, while U.S. Treasury bonds declined from the 55th to the 38th percentile. These improvements were apparent across the Treasury curve, with long-term Treasury valuations moving from the 56th to the 36th percentile. Global ex-U.S. aggregate bonds hedged to the U.S. dollar remain fairly valued, having shifted slightly from the 41st to the 39th percentile.
It is important to remember that valuation changes represent only one component of total return. For equities, other factors include earnings growth, dividends, and the currency impact of holding international shares. Valuations are typically poor indicators of performance over the short or even intermediate term and should not serve as the primary justification for adjusting portfolio allocations. Over the long term (generally 10 years or more), we believe valuations tend to revert toward average levels consistent with the prevailing interest rate and inflation environment.
Potential opportunities and cautionary signals for long-term Investments in bonds are subject to interest rate, credit, and inflation risk.
<a s primary investment research and advice teams. The model forecasts distributions of future returns for a wide array of broad asset classes. Those asset classes include U.S. and international equity markets, several maturities of the U.S. Treasury and corporate fixed income markets, international fixed income markets, U.S. money markets, U.S. municipal bonds, commodities, and certain alternative investment strategies. The theoretical and empirical foundation for the Vanguard Capital Markets Model is that the returns of various asset classes reflect the compensation investors require for bearing different types of systematic risk (beta). At the core of the model are estimates of the dynamic statistical relationship between risk factors and asset returns, obtained from statistical analysis based on available monthly financial and economic data from as early as 1960. Using a system of estimated equations, the model then applies a Monte Carlo simulation method to project the estimated interrelationships among risk factors and asset classes as well as uncertainty and randomness over time. The model generates a large set of simulated outcomes for each asset class over time. Forecasts represent the distribution of geometric returns over different time horizons. Results produced by the tool will vary with each use and over time.
