Why Wall Street's Latest Vanguard Picks Might Disappoint: A Reality Check on International Markets

The Prediction Trap: What Morgan Stanley Got Wrong Before

When investment analysts forecast returns seven years out, they’re essentially guessing. That’s the uncomfortable truth Wall Street rarely admits. Morgan Stanley’s recent prediction—that international equities will crush the S&P 500 over the coming seven years—sounds compelling until you check the scorecards from the last seven years.

Here’s the brutal comparison:

• S&P 500: +198% total return
• Vanguard FTSE Emerging Markets ETF: +71% return
• Vanguard FTSE Pacific ETF: +77% return

The U.S. market demolished emerging markets and Asia-Pacific by such massive margins that Morgan Stanley is essentially betting on a complete reversal. That’s possible. But Goldman Sachs data shows Wall Street analysts miss their year-end S&P 500 forecasts by an average of 18 percentage points annually. If one-year predictions are that unreliable, seven-year forecasts deserve serious skepticism.

The New Vanguard Case: What Morgan Stanley Actually Says

Despite the historical headwinds, Morgan Stanley analysts led by Lisa Shalett still see an opening for international exposure. They project the S&P 500 will return just 6.3% annually—a sharp deceleration from recent performance. The culprit: sky-high valuations. The S&P 500 currently trades at some of its most expensive cyclically adjusted price-to-earnings (CAPE) ratios in history.

By contrast, the analysts estimate emerging-market equities could deliver 8.9% annually, while Asia-Pacific stocks might return 7.9% annually. That 2-3% premium sounds modest, but it compounds significantly over time.

Understanding Vanguard’s Meaning in Portfolio Strategy

What does Vanguard mean to savvy investors? It typically signals low-cost, passive index exposure with minimal fees eating into returns. Both recommended funds carry expense ratios of just 0.07%—meaning you pay $7 annually per $10,000 invested. That compares favorably to the 1.2% average for emerging-market funds and 0.68% average for Pacific-focused funds. For anyone seeking international diversification without premium management fees, the Vanguard meaning is straightforward: accessible global markets.

The Emerging Markets Play: Where the Real Bets Are

The Vanguard FTSE Emerging Markets ETF tracks 6,000 companies across developing nations, with heavy concentration in China, Taiwan, and India. The fund’s biggest holdings tell the growth story:

• Taiwan Semiconductor: 10.3% weight
• Tencent Holdings: 4.5%
• Alibaba Group: 3.2%
• HDFC Bank: 1.1%
• Reliance Industries: 1.1%

Technology, financials, and consumer discretionary dominate the sector allocation. The question: can these Asian tech giants regain momentum after losing so badly to U.S. counterparts over the past seven years?

Asia-Pacific: Betting on Japan, South Korea, and Australia

The Vanguard FTSE Pacific ETF covers 2,300 companies across more mature Asian economies plus Australia. Its top five holdings reflect manufacturing and financial muscle:

• Samsung Electronics: 3.2%
• Toyota Motor: 2.1%
• SK Hynix: 1.9%
• Sony Group: 1.7%
• Mitsubishi UFJ Financial Group: 1.7%

Here too, the sector weighting emphasizes financials, industrials, and consumer discretionary. The risk remains identical to emerging markets: these regions underperformed the U.S. substantially over the last two decades, and reversals rarely happen overnight.

The Smart Allocation: Positioning for Caution

If you’re considering these Vanguard funds, think in terms of portfolio diversification rather than outperformance bets. A reasonable approach might allocate 10-20% to international exposure through these low-cost funds while maintaining 70-80% in U.S. equities via an S&P 500 index fund or individual stock picks.

The historical evidence is hard to ignore: U.S. markets crushed European, Asian, and emerging-market benchmarks over the last 5, 10, and 20 years. Morgan Stanley’s seven-year forecast would require an unprecedented shift in capital flows and relative valuations. It could happen. But betting your portfolio heavily on it contradicts decades of market data.

The smarter move? Stay skeptical of any 7-year forecast—from Morgan Stanley or anyone else. Use Vanguard’s low-cost structure as a tool for measured international exposure, but keep your core portfolio where it has actually worked: U.S. equities.