- Stocks and bonds both surged in 2025 (S&P 500 ~18%, U.S. aggregate bonds ~7%), a rare combo unlikely to repeat in 2026.
- With inflation and growth proving sticky, markets are pricing fewer or no Fed cuts, and rising long-term yields would pressure bond returns.
- Tight corporate credit spreads and high duration leave long-maturity bonds most vulnerable, while shorter, higher-quality bonds look relatively safer.
- Equity upside looks more dependent on earnings growth than valuation expansion as multiples are elevated and policy/inflation risks remain.
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In 2025, U.S. capital markets saw the rare phenomenon where both equities and fixed income generated strong positive returns. The S&P 500 returned approximately 18%, while the bond market (as measured by the Vanguard Total Bond Market ETF and the Bloomberg U.S. Aggregate Bond Index) returned roughly 7%–7.1%. These gains were facilitated by falling yields, easing inflation expectations, and multiple Fed rate cuts which supported both asset classes simultaneously.
Looking ahead to 2026, however, most authoritative forecasts diverge from the 2025 playbook. A strong and resilient economy—driven by ongoing AI investment, fiscal stimulus (e.g. tax cuts, infrastructure), and robust labor demand—suggests inflation may remain above target, particularly core inflation north of 3%. As a result, many analysts now foresee fewer Fed cuts or even a hold in rates, with some (e.g. JPMorgan) predicting no cuts in 2026. Meanwhile, the term premium on long-dated bonds is expected to rise due to fiscal deficits and inflationary pressure, pushing long yields upward.
The bond market, therefore, looks unlikely to match its 2025 performance. Total returns may be muted or negative for long-duration bonds if yields rise; premium carry in shorter- and mid-term maturities could offer more attractive risk-adjusted opportunities. Spreads on corporate credit are tight and appear vulnerable—particularly in sectors issuing heavily to fund AI and capex—raising the risk of spread-widening if macro conditions worsen.
For equities, the window for multiple expansion appears largely closed. The elevated valuation multiples suggest that future returns will depend increasingly on earnings growth. Sectors benefiting from AI infrastructure and productivity gains remain among the more favored, though political, inflationary, and policy uncertainties introduce substantial downside risk to these projections.
Supporting Notes
- In 2025, S&P 500 returned nearly 18%, and the Vanguard Total Bond Market ETF returned over 7%—attributed to declining yields and Fed easing.
- Bloomberg U.S. Aggregate Bond Index yield began 2025 at ~4.9%; RBC projects it will rise modestly in 2026 and that yields will be elevated, with 10-year Treasuries ending the year near ~4.55%.
- JPMorgan revised its forecast to expect no rate cuts in 2026, citing strong economic growth and inflation remaining above 3%.
- Analysts warn that long-duration bonds could lose value if yields rise sharply; risks include >30% losses for long maturity bonds in stress scenarios.
- Corporate bond spreads are tight; heavy issuance by tech/AI-related sectors could stress quality fixed income if fiscal or economic risks emerge.
- Equity valuation multiples are near historic percentiles; future returns will lean more on earnings growth than multiple expansion.