Are bonds doing better than stocks?

This article examines whether are bonds doing better than stocks by defining comparison metrics, reviewing 2024–2026 market conditions, summarising evidence and institutional views, weighing risks,...

2025-12-20 16:00:00

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Are bonds doing better than stocks?

As of 2026, many investors are asking: are bonds doing better than stocks? This article examines that question directly, explains how to measure “better” (total return, yield, risk‑adjusted return), reviews the 2024–2026 market backdrop in which many commentators observed strong bond performance, and lays out what the evidence and institutional views mean for different investors.

As of 2025-12-31, according to market reports, high starting yields, a peak-inflation to disinflation cycle, and shifting central-bank expectations produced material positive returns for many bond indices—leading to renewed debate over whether are bonds doing better than stocks, at least over some recent horizons.

Definitions and ways to compare performance

Before answering whether are bonds doing better than stocks, it helps to define the metrics investors use to compare the two asset classes. Different metrics can produce different answers.

Total return (price change + income): For bonds, total return combines coupon income and price appreciation (or depreciation). For equities, total return includes dividends plus price change. When yields are elevated, the income component of bond total return grows, improving the asset-class comparison.
Current yield vs. earnings yield: Current bond yields (e.g., the yield to worst or nominal coupon yield) can be compared with the earnings yield of equities (earnings/price or the inverse of the P/E ratio). When high-quality bond yields approach or exceed the S&P 500 earnings yield, some investors view bonds as more attractive on a near-term expected-return basis.
Forward expected equity returns and the equity risk premium: Expected equity returns depend on future earnings growth and valuations, while the equity risk premium is the expected excess return for holding equities instead of risk‑free bonds. A narrowing equity risk premium reduces the expected advantage of equities.
Risk‑adjusted returns (Sharpe ratio): Comparing mean returns adjusted for volatility is useful when the investor cares about return per unit of risk. In volatile periods, bonds with lower volatility can show higher risk‑adjusted returns than equities.
Correlations and hedging characteristics: Bonds and stocks differ in correlation across economic regimes. Bonds often provide diversification and downside protection during equity drawdowns, which matters to long‑term allocation decisions.
Time horizon differences: Short‑term volatility can produce episodes in which bonds outperform equities for months or a few years. Over long horizons, equities historically delivered higher average returns (the long‑term equity premium), but past performance does not guarantee future results.

Recent market backdrop (2024–2026)

Context matters when asking are bonds doing better than stocks. The 2024–2026 period featured several drivers that helped bond returns:

Disinflation and policy peak: Inflation trended downward from multi‑year highs in 2022–2023, and by parts of 2024–2025 markets priced a likely peak in policy rates and eventual cuts.
High starting bond yields: After rates rose materially in 2022–2023, many government and high‑quality corporate yields were significantly higher than in the pre‑2022 low‑rate era, creating more income carry for bond investors.
Yield curve dynamics: The yield curve moved through episodes of inversion, flattening, and later steepening as the growth/inflation outlook and Fed expectations evolved. Steepening at times benefited intermediate/longer-duration bonds once rate-cut expectations solidified.
Strong performance across some bond sectors in 2025: Multiple market reports noted that many bond indices posted mid‑single to high‑single digit returns in 2025, helped by price gains as yields eased and by coupon income.

As of 2025-12-31, according to Bloomberg-style and Morningstar summaries, the 10‑year Treasury yield spent significant time near the 4% area, with market pricing for Fed easing increasing through 2025. These dynamics were widely cited when evaluating whether are bonds doing better than stocks over recent windows.

Evidence that bonds have been doing better

Below we summarise the main strands of evidence that, in certain periods and on certain metrics, are bonds doing better than stocks.

Index and sector returns

Several broad fixed‑income indices produced strong positive returns in 2025. As of 2025-12-31, according to Morningstar and market index summaries, the Bloomberg U.S. Aggregate Index and many corporate and emerging‑market bond categories posted meaningful gains—often mid‑single to high‑single digits—driven by both income and price appreciation as yields eased from their peaks.

Those index gains meant that, for specific 12‑ to 24‑month windows, some bond indices outpaced major equity indices on a total‑return basis. That is one reason commentators asked are bonds doing better than stocks in those intervals.

Yield comparisons and valuation metrics

Analysts and media outlets highlighted periods where high‑quality fixed‑income yields (and Treasury yields) approached or exceeded equity earnings yields. As of late 2025, several reports noted that 10‑year Treasury yields near 4% and investment‑grade yields in the 4–5% range were competitive with the S&P 500 earnings yield in forward or trailing windows.

As of 2025-11-30, according to a Business Insider‑style summary and firm outlooks (e.g., Hartford Funds, Morgan Stanley commentary covered in business press), the crossover between bond yields and equity implied yields was presented as evidence that some of the traditional valuation advantage for equities had narrowed—supporting the view that are bonds doing better than stocks in terms of near‑term expected returns.

Institutional views and contrarian signals

Multiple large investment firms and research houses publicly advocated larger bond allocations or noted that extreme equity optimism could be a contrarian signal. For example, research notes and media coverage in 2025 cited views from Morgan Stanley, Fidelity, Vanguard, and Morningstar that suggested increasing fixed‑income exposure could be prudent for certain investor profiles.

As of 2025-12-15, market commentaries summarized by financial press pointed to broad institutional re‑weighting toward bonds and a re‑evaluation of the traditional 60/40 construct, reinforcing the question: are bonds doing better than stocks, at least tactically?

Drivers behind bond outperformance

Understanding why bonds outperformed in these periods helps clarify whether the outperformance is temporary or structural.

Starting yields and income carry

Higher starting yields raise the expected income component of bond total return. When yields are materially above zero, coupons contribute meaningfully to returns and cushion price volatility. That elevated carry was a primary driver of bond performance in the 2024–2025 window.

Monetary policy cycle and rate expectations

Bond prices benefit when markets expect central banks to lower policy rates from a high level. Expectations of peak policy rates followed by cuts pushed yields down from their intra‑cycle highs, producing price gains for existing bonds. These policy dynamics were central to the periods when bonds outpaced equities.

Term premium, yield‑curve dynamics, and duration effects

Changes in the term premium (the additional yield investors demand for holding longer maturity securities) influence returns across the curve. In episodes where the term premium compressed and long yields fell faster than short yields, long‑duration bonds delivered strong returns. Conversely, when term premium rises unexpectedly, long bonds can suffer.

Duration sensitivity matters: a given decline in yields produces larger price gains for longer‑duration bonds. In 2025 some long and intermediate maturities benefited disproportionately when yields moved lower.

Credit spreads and sector performance

Corporate credit and emerging‑market debt benefited when credit spreads tightened. In a risk‑on environment where default risks were reassessed favorably, investment‑grade corporates, high‑yield bonds, and emerging‑market local‑currency bonds contributed positive excess returns above Treasuries.

As of 2025-12-31, according to market sector breakdowns, emerging‑market local‑currency bonds experienced particularly strong inflows and returns in 2025 as growth differentials and yield carry attracted investors.

Risks and reasons stocks might still be preferable

Even if bonds outperformed equities over a recent window, there are reasons investors—and historic evidence—support equities for long‑term growth.

Long‑term equity premium and growth exposure

Historically, equities have delivered higher average returns over long horizons because they provide ownership of business cash flows and capture economic growth and productivity gains. For investors with long horizons and the ability to tolerate volatility, equities remain the primary engine for capital appreciation.

Duration and inflation risk for bonds

Bonds are vulnerable to rising inflation, inflation surprises, and a growth boom that pushes yields higher. Such shifts can produce price declines, especially for long‑duration holdings. If inflation reaccelerates or central banks delay cuts, bonds’ recent gains can quickly reverse.

Valuation, reversion, and market timing

Short‑term comparisons can mislead. Valuations revert, and a tactical tilt toward bonds based solely on recent relative performance could be reversed by subsequent market moves. Strategic allocation decisions should consider rebalancing discipline, time horizon, and investment goals rather than trying to time short windows.

Portfolio implications and practical guidance

This section outlines how investors might integrate the evidence into portfolio decisions while preserving clarity about goals and constraints.

Roles of bonds in a portfolio

Bonds serve several classic roles: income generation, capital preservation, diversification (reducing portfolio volatility), and liquidity. When bonds offer higher yields, their income and capital‑preservation roles become more valuable—but those roles depend on duration, credit quality, and investment horizon.

Allocation frameworks and tactical tilts

Strategic allocation: Maintain a long‑term mix that reflects risk tolerance and goals. The long‑term equity premium supports allocations to equities for growth.
Tactical tilts: Some firms advocated increasing fixed‑income weights in 2025 as yields rose and expected returns improved. Tactical tilts should be time‑boxed and disciplined, with explicit rebalancing rules.
Rebalancing: If bonds outperform, systematic rebalancing (e.g., selling fixed income to buy equities back to target) enforces buy‑low sell‑high behavior and captures long‑term return benefits.

As of 2025-12-01, several institutional commentaries—summarised in the press—recommended tactical fixed‑income increases for certain investor profiles, while cautioning that such moves are not one‑size‑fits‑all.

Implementation options

Investors can access bond exposure via multiple instruments. Options include:

Treasury ETFs/funds and nominal Treasuries for sovereign exposure and liquidity.
Investment‑grade corporate bond ETFs/funds for higher yields with moderate credit risk.
Municipal bonds for tax‑adjusted income (profile dependent on tax status).
Bond ladders (individual securities across maturities) for predictable cash flows and duration control.
Active managers for credit selection and duration management.
Emerging‑market local‑currency debt for yield and diversification, with higher volatility.

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Note: This overview is informational and not investment advice. Investors should consult licensed advisors for personalised guidance.

Historical episodes where bonds outperformed stocks

Bonds have episodically outperformed equities in varied macro environments. A few illustrative episodes:

Early 2000s (post‑tech bust): After the equity market peak in 2000 and the subsequent recession, high‑quality bonds provided capital protection and attractive real returns as yields fell with monetary easing.
2008–2009 (global financial crisis): Flight‑to‑quality into government bonds produced outsized bond returns while equities plunged.
2019 (late‑cycle rally in bonds): With growth concerns and easing by major central banks, bonds delivered strong returns that year, helping portfolios on a risk‑adjusted basis.
2022–2025 transition: The 2022 rate shock produced severe negative returns for long bonds in that year, but as inflation moderated and yields stabilized/rallied, bonds produced competitive returns across 2023–2025 windows—leading to renewed attention on whether are bonds doing better than stocks for those periods.

These episodes show that bonds can outperform during disinflation, growth slowdowns, or crisis periods—but the drivers and duration of outperformance vary.

How to assess “better” for your situation

To decide whether are bonds doing better than stocks for you, use this checklist:

Define your time horizon: Short (months–years) vs. long (decades).
Clarify income needs: Do you need current income now or prioritise long‑term growth?
Assess risk tolerance: Can you tolerate equity drawdowns in pursuit of higher expected returns?
Review tax situation: Municipal bonds or tax‑aware strategies may change net attractiveness.
Consider liquidity needs: Do you need quick access to capital?
Scenario analysis: Test portfolio outcomes under inflation surprises, growth shocks, and central‑bank shifts.
Rebalancing plan: Commit to rules to lock in gains and control risk.

Answering these questions helps determine whether short‑term or tactical observations that are bonds doing better than stocks warrant allocation changes.

Expert and institutional perspectives (summary of cited sources)

Below are concise summaries of how major institutions and market commentators framed the question during 2024–2026 (examples drawn from market press and research coverage):

Morningstar and MarketWatch analyses highlighted that bond returns in 2025 were robust and that some investors and allocators viewed bond yields as providing an attractive return alternative to equities in the near term.
Morgan Stanley research discussed tactical and strategic allocation implications, with some notes recommending higher fixed‑income exposure for certain risk profiles as yields rose.
Fidelity and Vanguard pieces emphasised the historical role of equities for long‑term growth while acknowledging that higher yields made fixed income more compelling in the shorter term.
Business Insider and Hartford Funds coverage focused on the yield/earnings‑yield crossovers and what those valuation metrics implied about near‑term expected returns.
Capital Group and Barron’s analyses provided context on how investors could implement bond allocations and the trade‑offs between duration, credit, and liquidity.

As of 2025-12-31, according to aggregated media summaries, institutional sentiment skewed toward appreciating the improved return potential of bonds while reminding investors of equities’ long‑term growth role.

Counterarguments and open questions

The question are bonds doing better than stocks does not have a permanent answer; it depends on future regimes. Key uncertainties include:

Future path of inflation and growth: Reaccelerating inflation or a strong growth surprise could push yields higher and hurt bond prices.
Central bank policy surprises: Faster‑than‑expected hikes or delayed cuts would change the relative returns materially.
Fiscal issuance and supply dynamics: Large government bond issuance can pressure yields higher, affecting returns.
Term premium regime shifts: Changes in the term premium can reverse the gains seen when term premium compressed.
Correlation shifts: The historical negative correlation between bonds and equities is not guaranteed; correlations can rise, reducing diversification benefits.

These open questions justify scenario planning rather than declarative statements about which asset class is always better.

References and further reading

(Selected market reports and press coverage that informed the analysis)

As of 2025-12-31, Morningstar articles and index summaries reporting 2025 bond index returns and sector performance.
As of 2025-12-15, Morgan Stanley research notes and client commentaries discussing fixed‑income allocation shifts.
As of 2025-11-30, Business Insider and Hartford Funds coverage on yield vs. earnings‑yield comparisons.
As of 2025-12-01, Fidelity and Vanguard investor education pieces on bond market outlooks and portfolio positioning.
As of 2025-12-31, Bloomberg-style market summaries describing 10‑year Treasury yields near the 4% area during parts of 2025.
Capital Group and Barron’s primers on implementation options (bond ETFs/funds, ladders, active management) as referenced in press.

Note: The above references summarise reporting and institutional commentary appearing in financial press and research during 2024–2025. Readers should consult the original provider reports and regulatory filings for primary documentation.