Global stock markets are having another strong year so far.
The S&P 500, which tracks 500 of the largest listed companies in the US, is on course for a fourth consecutive year of double-digit returns. Company earnings have generally held up well around the world, with particularly strong growth from technology businesses, many of which have significant exposure in the US and Asian equity indices.
Period | 2021 - 2022 | 2022 - 2023 | 2023 - 2024 | 2024 - 2025 | 2025 - 2026 |
|---|---|---|---|---|---|
S&P 500 return % | -14% | 15% | 27% | 17% | 14% |
Looking ahead, analyst expectations for companies to grow their earnings in 2027 appear relatively modest in our opinion. That can be helpful for stock markets because companies do not need to clear an especially high bar to meet or exceed expectations.
However, there is an important counterweight. This is that bond yields have continued to rise in the UK and globally, with some markets back near levels last seen about 20 years ago.
That matters because higher bond yields change the investment backdrop. When cash and government bonds offered very low returns, shares looked more attractive by comparison. Today, investors can earn more income from lower-risk bonds, like gilts, than they could for much of the last 20 years.
For bonds, the starting yield can be useful to help determine what returns an investor could receive over time. It is not a guarantee, and prices can still move around, but higher starting yields give investors more income and a greater cushion than they had when yields were close to zero.
Bonds vs shares – what rising yields mean for investors
The picture for shares is more nuanced.
Rising bond yields do not automatically mean that stock markets will fall. Shares can still perform well, particularly when earnings are growing.
Over the long term, stock markets have offered stronger growth returns than bonds, which is why they remain an important part of a diversified portfolio.
The Barclays Equity Gilt survey looks at returns over 114 years. The ‘real’ (adjusted for inflation) annual return from shares was 5.1% (Barclays UK Equity Index). For gilts, it was 1.2% (Barclays UK Gilt Index) and it was 0.8% for cash (Barclays UK Treasury Bill Index).
However, today the gap between the expected returns from company shares and bonds now looks narrower than it did. That makes balance more important.
Government bonds, including gilts, can offer a useful source of income and potential stability. In the UK, capital gains on gilts are tax free for retail investors, which makes them particularly attractive at these levels.
Remember, though, fixed income is just that, fixed. It’s only by holding shares that you can have the opportunity to participate in long-term company growth.
Why diversification matters more than ever
The key message is not that bonds will necessarily outperform shares. Markets rarely move in straight lines, and both asset classes have risks. But after years when companies looked like the only choice for long-term investors, bonds are once again offering a meaningful return. Although, there are of course, no guarantees.
For many investors, that strengthens the case for a well-diversified portfolio rather than relying too heavily on any single market, sector or asset class.
This article is for information only and not personal financial advice. Investing can help your money grow, but the value of investments can rise and fall, so you could get back less than you put in. Investing is for the long term, typically 5 years or more.
If you’re not sure whether investing is right for you, a financial adviser can help.