Pimco, a leading global bond management firm, has observed a divergence between the U.S. stock and bond markets, suggesting that investors may consider increasing their exposure to risk assets. This shift comes as inflation pressures ease and U.S. economic growth slows, restoring the negative correlation between stocks and bonds.
According to Pimco portfolio managers Erin Browne and Emmanuel Sharef, the correlation between stocks and bonds tends to decrease and turn negative when inflation and GDP growth slow down, as is currently the case in the U.S. and many other major economies. This environment allows investors to potentially enhance returns by expanding their allocation to risk assets without significantly increasing overall portfolio volatility.
Year-to-date, the Bloomberg U.S. Aggregate Bond Index has risen by 1.6%, while the S&P 500 Index has gained 24%. Pimco's report highlights that stocks and bonds can complement each other in portfolio construction and may both benefit from a soft landing in the firm's baseline economic scenario.
For multi-asset portfolios, Pimco slightly favors U.S. equities, while in the bond market, it prefers high-quality core bonds, typically including investment-grade bonds. In light of potential tariff increases by Trump, investors are advised to focus on U.S. companies whose earnings are less dependent on imports.
