As the S&P 500 (SNPINDEX: ^GSPC) has climbed from one all-time high to another over the last year, many investors have probably seen very strong returns for their portfolios. The benchmark index has climbed 27% over the past 12 months, with AI stocks leading the way. The tech-heavy Nasdaq Composite (NASDAQINDEX: ^IXIC) is up an impressive 39% in the same period.
But the strong performance of stocks over the past year hasn’t been matched by other asset groups. For example, U.S. long-duration bonds, such as those held by the iShares 20+ Year Treasury Bond ETF (NASDAQ: TLT), have returned close to nothing over the past year. As a result, many portfolios may be unbalanced. Instead of waiting, investors should consider rebalancing right now.
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Stocks and bonds are on divergent paths
Stocks typically outperform bonds over the long run, but the recent one-year relative performance of stocks to Treasuries sits in the 95th percentile of all 12-month periods dating back 50 years.
The stock market’s performance has been extremely impressive, and for good reason. S&P 500 companies reported earnings growth of 28.6% in aggregate last quarter, the highest level since the fourth quarter of 2021, according to FactSet Research. Eighty-five percent of companies beat estimates last quarter. The outlook remains strong as well, with many analysts raising earnings expectations. They now expect aggregate earnings to grow 22.6% for the full year.
Meanwhile, bonds have been weighed down by the challenging inflation environment. While inflation was starting to come down toward the Federal Reserve’s 2% target, it has spiked in recent months because of the war in Iran. With the Strait of Hormuz closed, energy prices and other commodity prices have skyrocketed. The Consumer Price Index for April reached 3.8%, and the Federal Reserve Bank of Cleveland expects that number to climb to 4.2% for May.
Futures traders have gone from pricing in one to two rate cuts from the Fed for the year at the start of 2026 to pricing in a greater than 50% chance of one or two rate increases. That’s had a noticeable effect on long-term bonds. The 30-year Treasury yield reached a 19-year high earlier this year. (When yields increase, bond prices decrease.)
With corporate earnings outlooks continuing to improve while interest-rate outlooks worsen for bondholders, some investors may wonder why the market wouldn’t simply continue down its current path. But the important thing to remember is that the market is always forward-looking. All of the expectations are already priced into the stock prices and bond prices you pay today.
