60/40 strategy regains strength

Stock-bond correlations are easing, restoring diversification benefits for investors. The classic 60/40 portfolio is rebounding, delivering stronger returns and lower volatility as inflation concerns fade and growth uncertainty rises.

Inflation and economic growth uncertainties affect stock-bond correlations differently: inflation shocks typically lead to positive correlations, with stocks and bonds moving together due to its adverse effects on both. Economic growth uncertainty drives negative correlations as investors seek safety in bonds while stocks can suffer. For this exercise, we use the volatility of industrial production to proxy economic growth volatility, and the volatility of CPI to proxy inflation volatility. A falling Growth vol/Inflation vol ratio signals dominant inflation concerns and a rising ratio reflects growth worries. Before 2000, inflation uncertainty dominated (Ratio of Growth vol/Inflation vol falling) and correlations were positive. From 2000–2021, growth uncertainty increased (Ratio rising), turning correlations negative. Over the past few years inflation concerns have returned again, making way for the return of positive correlations, something we believe is likely to reverse.

Weekly highlights

Average stock-bond correlation is based on a 36-month rolling average (data as of September 2025). 60/40 portfolio uses S&P 500 for equities and Bloomberg US Treasury Index for bonds (data as of 22 September 2025).

Performance of 60/40 portfolio in different regimes

For decades, the 60/40 portfolio-a strategic allocation of 60% equities and 40% fixed income, has represented a core foundational approach to portfolio construction for both institutional and retail investors. Rooted in Modern Portfolio Theory, this framework leverages the principle that combining assets with low or negative correlation can enhance risk-adjusted returns. Historically, equities delivered capital appreciation while bonds provided income and acted as a ballast during equity drawdowns, creating a robust diversification benefit.

This negative correlation was the key to the strategy’s success. When equity markets faltered, duration exposure in bonds typically rallied, cushioning portfolio volatility. Thanks to its simplicity and effectiveness, this asset allocation approach has remained a popular choice among investors for decades.

However, the post-pandemic period has fundamentally challenged this long-standing paradigm. The inflation shock of 2022 upended the traditional stock-bond relationship. With CPI surging well above the Fed’s 2% target and policy rates rising at the fastest pace in decades, both equities and Treasuries sold off in tandem. The result was stark: the 60/40 portfolio delivered one of its worst calendar-year performances in modern history, declining 16.7% in 2022. Elevated rate volatility, coupled with heightened macroeconomic and policy uncertainty, ushered in what many now refer to as a “new regime” for traditional asset allocation, one defined by compressed return expectations and structurally higher portfolio volatility. This transition to a world of persistent interest rate volatility and greater macro-policy unpredictability has reshaped the investment landscape. As the accompanying chart illustrates, 60/40 portfolio outcomes over the past three years, when the average stock-bond correlation spiked to 0.41, reflect this shift, with diminished return potential and increased volatility compared to the prior decade, when the average correlation stood at -0.37.

A key driver of this regime shift was the breakdown in diversification. Stock-bond correlations, which had been persistently negative for over a decade post-GFC, turned positive as inflation became the dominant macro variable. Since early 2022, equities and bonds declined simultaneously for 14 consecutive months, representing 31% of the time. This erosion of the hedging property fundamentally questioned the efficacy of the 60/40 portfolio construct.

However, recently the macro narrative has pivoted from inflation concerns to growing fears of economic slowdown. With core PCE now below 3% and long-term inflation expectations anchored near 2% , the Fed has turned its attention to supporting growth, prompting rate cuts. The Fed’s 2025 GDP forecast, initially at 2.1% in December 2024, was revised down to 1.6% by September , reflecting the impact of tariffs, policy uncertainty, and a cooling labor market. Consequently, the 36-month stock bond correlation appears to have eased from its peak of 0.66 in December 2024 to 0.48 by September 2025. Looking at the shorter 12-month horizon, the correlation has dropped even more sharply-from a high of 0.80 in July 2024 to just 0.16 currently. This shift indicates an improving potential for diversification. Against this setting, the traditional 60/40 portfolio has delivered a robust year-to-date annualized return of 14.2%, with volatility compressing to 7.3%. If current trends persist, bonds may reclaim their role as effective diversifiers, reinforcing the strategic relevance of the 60/40 allocation in multi-asset portfolios.