Bonds vs Stocks in 2025: Where to Invest as Interest Rates Peak and Markets Rally

As 2025 draws to a close, investors are facing a rare moment: both stocks and bonds have had a strong year, and major central banks are preparing to cut interest rates after one of the sharpest tightening cycles in decades. That makes the classic question — bonds vs stocks — feel more urgent than it has in years.

U.S. stocks are up by the mid‑ to high‑teens in 2025, with the S&P 500 boosted by strong tech earnings and resilient consumer demand. ^[1] Global stocks, measured by the MSCI ACWI index, have delivered more than 23% year‑to‑date through the end of October. ^[2] Meanwhile, the Bloomberg U.S. Aggregate Bond Index is up just over 7% in 2025, a solid year for fixed income after the brutal sell‑offs of 2022–23. ^[3]

With 10‑year U.S. Treasury yields hovering around 4.1% as of early December ^[4] and markets pricing in interest‑rate cuts, the playing field between bonds and stocks looks very different from the zero‑rate era.

This article walks through:

• What bonds and stocks actually are and how they make money for you
• The 2025 macro backdrop and central bank moves
• Latest forecasts from Vanguard, Goldman Sachs, Morgan Stanley, JPMorgan, Fidelity, Schwab, and others
• The renewed debate over the 60/40 portfolio
• Practical guidelines to decide your own mix of bonds vs stocks in 2025–26

Bonds vs Stocks: The Basics (Quick Refresher)

Before we dive into forecasts, it helps to be crystal clear on what you’re actually buying.

What is a stock?

A stock is an ownership stake in a company. You make money if:

• The share price rises (capital gains)
• The company pays dividends (income)

Characteristics:

• Higher expected long‑term return
• Higher volatility — prices can swing a lot in the short term
• No promised payout: dividends and prices can be cut or wiped out
• Best suited for longer time horizons and investors who can tolerate drawdowns

Historically, stocks have outperformed bonds over long periods because shareholders take more risk and demand an equity risk premium — an extra return for holding risky assets. Academic work like Clifford Asness’s “Stocks Versus Bonds: Explaining the Equity Risk Premium” finds that over long horizons, stocks have indeed delivered higher returns than bonds, though not in every decade. ^[5]

What is a bond?

A bond is a loan you make to a government, company, or other borrower. You make money through:

• Regular coupon payments (interest)
• Getting your principal back at maturity
• Potential capital gains if yields fall and bond prices rise

Characteristics:

• Income‑focused; cash flows are usually contractual
• Typically lower volatility than stocks (especially high‑quality government and investment‑grade bonds)
• Higher position in the capital structure — bondholders get paid before shareholders if a company is liquidated
• Best suited for income, capital preservation, and diversification

In a world where high‑quality bonds now yield 4–5% or more in many markets, the traditional income role of bonds has come roaring back.

The 2025 Backdrop: High Yields, High Stock Prices

The decision between bonds and stocks in 2025 can’t be separated from the macro story: inflation has cooled, growth has slowed but not collapsed, and interest rates have likely peaked.

Central banks: from hikes to cuts

• The Federal Reserve is widely expected to deliver a 25‑basis‑point rate cut at its December 2025 meeting. A Reuters poll of economists puts the probability of a December cut around 87%, and major banks like Morgan Stanley, JPMorgan and BofA have all shifted to forecasting a cut. ^[6]
• Morgan Stanley now expects additional 25‑bp cuts in January and April 2026, with a terminal Fed funds rate of about 3.0–3.25%, down from today’s higher levels. ^[7]
• Globally, the OECD describes the outlook as “resilient growth but with increasing fragilities,” as many economies slow toward trend growth while inflation drifts closer to target. ^[8]

Meanwhile, the 10‑year U.S. Treasury yield sits around 4.1%, down from the peaks above 5% seen in 2023–24 but still well above the near‑zero levels of the 2010s. ^[9]

2025 performance: both stocks and bonds are winning

• U.S. equities
  • Business Insider reports that the S&P 500 is up over 16% year‑to‑date in 2025 as of late November, powered by strong tech earnings and robust consumer demand. ^[10]
  • S&P Dow Jones data shows a one‑year price return of about 13% as of December 3, 2025. ^[11]
• Global equities
  • The MSCI ACWI index shows a 23.19% year‑to‑date gross return through October 31, 2025. ^[12]
  • International stocks have outpaced U.S. shares in 2025, with Fidelity noting that non‑U.S. stocks returned around 26% through late November, outpacing the S&P 500 by double digits. ^[13]
• Bonds
  • The Bloomberg U.S. Aggregate Bond Index shows a 7.11% year‑to‑date return and a 1‑year return above 5% — modest compared with stocks, but a big improvement over recent years. ^[14]

In short: stocks are having a great year, but bonds are finally pulling their weight again.

What the Big Institutions Expect Next

This is where the debate gets really interesting. Many of the world’s largest asset managers and banks are now openly asking whether bonds may outperform stocks from here, at least in some markets and time horizons.

Vanguard: U.S. bonds may beat U.S. stocks over the next decade

Vanguard’s latest 10‑year capital markets outlook projects: ^[15]

• U.S. bonds: 4.3% – 5.3% annualized
• Global bonds (ex‑U.S.): 4.3% – 5.3%
• U.S. equities: 2.8% – 4.8%
• Developed international equities: 7.3% – 9.3%
• Emerging‑market equities: 5.2% – 7.2%

Those ranges imply that U.S. bonds could outperform U.S. stocks over the next decade, while international equities may still offer higher expected returns than both. ^[16]

A recent MarketWatch summary of Vanguard’s numbers warns that if U.S. stock returns land in the low end of that range, the classic “4% rule” for retirees could come under pressure, because expected real returns on U.S. equities may be close to zero after inflation. ^[17]

Goldman Sachs: global stocks still attractive, but not cheap

Goldman Sachs Research, looking at global, not just U.S., equities, is more optimistic on stocks overall. In a November 2025 outlook, it forecasts global stocks to return about 7.7% per year in U.S. dollar terms over the coming decade, despite elevated valuations. ^[18]

That suggests a world where:

• U.S. stocks may deliver modest returns
• Non‑U.S. stocks could be the main engine of equity performance
• Bonds provide income and a growing slice of the return pie

Morgan Stanley, JPMorgan, Parametric: equity risk premium is unusually low

Several firms argue that bonds look cheap relative to stocks, especially U.S. stocks:

• Morgan Stanley says current bond yields are “strongly superior” to S&P 500 pricing, with the equity risk premium (the extra return you’re paid for owning stocks over bonds) at its lowest level in 20 years, and sees bonds potentially continuing to beat stocks. ^[19]
• Parametric Portfolio Associates estimates that the spread between the S&P 500 earnings yield and the 10‑year Treasury yield is only about 6 basis points, versus a historical average of roughly 300 basis points — making bonds the most undervalued relative to stocks in more than two decades. ^[20]
• Schroders and other research houses likewise warn that a very slim equity risk premium has historically meant lower future stock returns versus bonds. ^[21]

In plain English: you’re currently not being paid much extra to take stock‑market risk — at least in U.S. large caps — compared with what high‑quality bonds will give you in yield.

Fixed income specialists: income is back

Fixed income‑focused outlooks for 2026 share a common theme:

• Charles Schwab expects “solid returns” in fixed income, driven mainly by coupon income rather than big capital gains, as yields may not fall dramatically but should drift lower as central banks cut rates into a softer labor market. ^[22]
• Fidelity notes that bonds already delivered strong positive returns in 2025 (around 7% for the U.S. Aggregate) and sees them remaining an important diversifier, even as stocks continue to set records. ^[23]
• Vanguard highlights “attractive real yields” and renewed downside protection from high‑quality fixed income compared with the ultra‑low‑yield world of the 2010s. ^[24]

Meanwhile, PIMCO, Goldman Sachs, and Cambridge Associates all emphasize opportunities in segments such as high‑quality securitized credit, parts of the CLO market, and carefully selected corporate bonds — but warn that credit spreads in U.S. high yield and investment‑grade are near the tightest levels in history, which makes these areas more sensitive to any growth disappointment. ^[25]

The Case for Stocks in 2025–26

Even with a thin equity risk premium in U.S. large caps, there are still solid arguments for stocks:

1. Long‑term growth engine
   Over multi‑decade horizons, equities have historically outperformed bonds more often than not, reflecting real earnings growth and inflation passthrough. ^[26]
2. Global breadth and sector rotation
   • 2025 has been a global equity story, with international stocks outpacing U.S. equities. ^[27]
   • Thematic drivers such as AI, energy transition, and infrastructure spending are still attracting large capital flows; BlackRock expects AI‑linked companies to continue to drive markets in 2026, albeit with higher volatility. ^[28]
3. Valuation dispersion
   While mega‑cap growth stocks look pricey, value stocks and small caps have recently outperformed and still trade at discounts, according to Morningstar’s December 2025 stock market outlook. ^[29]
4. International opportunity
   Citigroup, for example, has set a 2026 year‑end target for the European STOXX 600 index about 10% above current levels, citing fiscal spending and European Central Bank rate cuts, and expects more than 8% earnings growth in 2026 after a flat 2025. ^[30]

So while headline U.S. valuations may look stretched, global equities and non‑mega‑cap segments still offer reasonable long‑term potential — especially when combined with bonds in a diversified portfolio.

The Case for Bonds: “Bonds Are Back” Isn’t Just a Slogan

After years of near‑zero yields, investors can finally say this without irony: bonds pay real income again.

Key points in bonds’ favor:

1. Starting yields are high by recent standards
   With 10‑year Treasuries yielding around 4.1% ^[31] and many investment‑grade corporates yielding above 5%, investors can lock in payouts that rival many equity return forecasts — without the same level of volatility.
2. Central banks are moving toward cuts
   Forecasts from BofA’s Mark Cabana see the 10‑year Treasury finishing 2026 in the 4.0–4.25% range, with 25‑bp Fed cuts expected in December 2025 and twice in 2026. ^[32] If those cuts materialize, bond prices should be supported, even if most of the return comes from coupons.
3. Relative value vs. U.S. equities
   Parametric, Morgan Stanley, and others argue that the equity risk premium is extremely compressed, making bonds the cheapest they’ve been relative to U.S. stocks in two decades. ^[33]
4. Diversification is working again
   During 2022, both stocks and bonds fell together, leading many to declare the classic 60/40 dead. But 2025 has been a reminder that when inflation is under better control and yields are positive, bonds can once again act as a shock absorber. Firms like Federated Hermes and JPMorgan have published research arguing that reports of the “death” of the 60/40 portfolio are greatly exaggerated. ^[34]
5. High yield vs. equities
   Research from PGIM shows that since 2001, global high‑yield bonds have actually outperformed global equities on an absolute and risk‑adjusted basis, though with its own risks and drawdowns. ^[35] That doesn’t mean “buy all the junk bonds”, but it underlines that parts of fixed income can be powerful return engines, not just ballast.

The 60/40 Portfolio Debate: Still Alive in 2025

If you’re thinking “why not both?”, you’re in good company.

A traditional 60% stocks / 40% bonds portfolio has quietly staged a comeback:

• One analysis of a simple three‑fund 60/40 portfolio shows a gain of nearly 16% in 2025, and about 7.8% per year in the 2020s so far — including the 2022 bond crash. ^[36]
• Long‑term studies from Morningstar and Janus Henderson find that a 60/40 portfolio has historically had a high probability of delivering real returns (after inflation) of ~4% or more over 10‑year horizons, with far smaller drawdowns than an all‑stock allocation. ^[37]

BlackRock’s 2025 “Investment Directions” argues that although both equity and fixed‑income risks may be structurally higher, balanced portfolios with meaningful bond exposure still make sense, especially now that yields are positive. ^[38]

So instead of asking “bonds or stocks?”, a more 2025‑appropriate question might be: “What mix of bonds and stocks fits my goals given today’s yields and valuations?”

Scenario Thinking: How Bonds vs Stocks Might Behave Next

Because no one actually knows the future, it can help to think in scenarios rather than single‑point forecasts.

Scenario 1: Soft landing, steady disinflation (consensus)

• Growth slows but stays positive
• Inflation trends toward central‑bank targets
• Central banks cut rates gradually

Likely winners:

• High‑quality bonds benefit from lower rates and deliver steady income
• Equities deliver moderate returns, with leadership shifting toward unloved regions (international stocks) and sectors (value, cyclicals)

In this world, bonds look especially attractive relative to richly valued U.S. large‑cap stocks, but an all‑bond portfolio would still miss out on equity growth.

Scenario 2: Growth disappoints (harder landing)

• Unemployment rises faster than expected
• Corporate earnings come under pressure
• Rate cuts accelerate

Likely winners:

• Government bonds and high‑quality investment‑grade debt typically rally as investors seek safety
• Stocks could suffer larger drawdowns, especially cyclical and speculative segments

Here, bonds clearly win vs stocks, especially on a risk‑adjusted basis.

Scenario 3: Inflation re‑accelerates or stays sticky

• Energy or geopolitical shocks push prices higher
• Markets reassess how low rates can really go
• Bond yields rise again

Likely winners:

• Inflation‑linked bonds (TIPS), real assets, and certain equity sectors (energy, quality value) may fare better
• Long‑duration government bonds could struggle
• Stocks could still outperform bonds over time if companies can pass higher prices onto consumers

This is the scenario where stocks may regain a clearer edge over nominal bonds, but with more volatility.

How to Decide Between Bonds and Stocks in 2025

None of the forecasts above can replace a personal plan, but there are some practical principles that fit today’s environment.

1. Start with your time horizon and risk tolerance

• Under 5 years until you need the money?
  You generally can’t rely on stocks behaving over such a short window. High‑quality short‑ to intermediate‑term bonds and cash‑like instruments usually play a bigger role.
• 10+ year horizon?
  Equities still have the edge for long‑run growth, but given today’s yields and valuations, many institutions are nudging long‑term investors toward a bit more bonds than in the ultra‑low‑rate era, especially in U.S. portfolios. ^[39]

2. Think globally, not just U.S. large caps

If Vanguard and Goldman are roughly right, the return story for the next decade may look like:

• U.S. bonds: competitive with U.S. equities
• International equities: higher expected returns than both
• A global mix of stocks and bonds beating a U.S.‑only approach

That argues for diversifying beyond U.S. large‑cap stocks and including international stocks and bonds alongside U.S. Treasuries, investment‑grade corporates, and perhaps a measured allocation to high yield or securitized credit. ^[40]

3. Reassess your 60/40 — don’t abandon it

With both stocks and bonds posting strong returns in 2025, many portfolios have drifted away from target allocations:

• If stocks have run ahead, rebalancing back toward bonds can both lock in some equity gains and increase your income stream.
• If you abandoned bonds entirely in 2022–23, you might now be overexposed to equity risk at a time when the equity risk premium is unusually low. ^[41]

A 60/40 or similar balanced mix isn’t magic, but decades of data suggest it’s a resilient core strategy, especially when starting yields are this high. ^[42]

4. Use bonds intentionally, not as an afterthought

Instead of treating fixed income as a single monolithic bucket, consider:

• Short‑term vs. intermediate‑term bonds: shorter maturities are less sensitive to rate moves; intermediate can benefit more from cuts.
• Government vs. corporate vs. securitized: different credit and liquidity risks, different yield levels.
• Investment‑grade vs. high yield: higher yield comes with higher default risk; position size and diversification are critical. ^[43]

5. Stay flexible — especially for 2026

2026 could be a year where AI, shifting consumer strength, and potentially fewer rate cuts than markets hope cause bouts of volatility. BofA, for instance, has warned about a possible “AI air pocket” and a squeezed consumer weighing on U.S. stocks in 2026, even as it still expects earnings growth overall. ^[44]

Flexibility can mean:

• Using regular rebalancing rather than big all‑in/all‑out moves
• Diversifying across sectors, regions, and asset classes
• Holding some cash or short‑term bonds to take advantage of dislocations

Bottom Line: It’s Not “Bonds or Stocks” — It’s “What Balance Fits 2025?”

If you zoom out, three messages emerge from the latest research and forecasts:

1. Stocks are still the growth engine, but U.S. large caps don’t look cheap, and expected returns there are modest by historical standards. ^[45]
2. Bonds are genuinely back as an income and diversification tool, with yields high enough that they can plausibly rival or beat U.S. stock returns over the next decade — at least according to Vanguard, Morgan Stanley, Parametric and others. ^[46]
3. Balanced, globally diversified portfolios (60/40 or similar) look more compelling now than at any point in the past 15 years, because both legs of the stool — stocks and bonds — finally have positive expected real returns. ^[47]

For investors, the practical takeaway is less about trying to pick a single “winner” between bonds and stocks, and more about using both intelligently given today’s unusual mix of:

• Still‑high bond yields
• Strong but expensive equity markets
• Central banks that are edging from tightening to easing
• An uncertain, but not catastrophic, global growth outlook

As always, your specific mix should reflect your goals, time horizon, and risk tolerance, ideally with input from a qualified adviser. But in late 2025, one thing looks clear: the old conversation about “bonds vs stocks” is back — and this time, bonds finally have a real seat at the table.

References

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