Bonds Take the Lead Over Stocks in 2025

Concerns about inflation may have created headwinds for bonds, but fixed-income returns are managing to outpace the stock market, as its post-election rally has been undone by a brewing trade war and losses from the big technology stocks that had led the bull market.

The Morningstar US Market Index was down 0.6% as of Wednesday’s close, while the Morningstar US Core Bond Index was up 2.3%. With the so-called “Trump bump” after the election having largely been erased, since Nov. 5, stocks are up 2.5%, while the Core Bond Index has returned 1.7%.

Bonds Providing Ballast

Dominic Pappalardo, chief multi-asset strategist at Morningstar, says bonds are fulfilling their traditional role in a portfolio, providing a short-term offset to declines in the stock market. “Fixed income has been providing some ballast and hedging benefits through the recent market turmoil, displaying the traditional negative correlation between stocks and bond returns,” he explains. A negative correlation occurs when prices on a pair of investments tend to move in the opposite direction.

“While bonds have not rallied enough to offset the equity drawdowns—they rarely do—the benefit of investing in a diversified multi-asset portfolio has been evident,” Pappalardo says. He contrasts the recent moves with 2022, when both bonds and stocks suffered significant declines. That year, the Core Bond Index lost nearly 13.0% and stocks fell 19.4%.

Of course, over time, stocks generally outperform bonds. Last year, stocks gained 24.1%, surpassing six of the past 10 years’ returns, while the Core Bond Index rose 1.4%. Over the past decade, the US Market Index is up an average of 12.2% per year, while bonds have returned an average of 1.5% per year.

Tariff Troubles for Stocks

2025 started on a strong note for US equities. Stocks rose throughout January, with the US market index peaking at a 4.7% year-to-date gain on Feb. 19. Since then, it’s slipped steadily, with recent volatility following developments in US trade policy. President Donald Trump announced his intentions to implement 25% tariffs on autos, pharmaceuticals, and semiconductors in a press conference on Feb. 18.

Bonds were flat for most of January and the first half of February, with the Core Bond Index up just 0.2% by Feb. 12. On Feb. 13, Trump released a memo announcing a program to counter “non-reciprocal trading arrangements” and proposing new tariffs. The index has since risen to a 3% year-to-date return through Monday.

Stock ETF Flows Fade in March

Against this backdrop, interest in US stock exchange-traded funds has cooled significantly. They started the year strong, with inflows totaling about $50 billion in both January and February, compared with roughly $40 billion each month for bond ETFs.

March has been different, with bond ETFs pulling in $3.4 billion while stock ETFs have seen $4.1 billion in outflows.

The shift in ETF flows reflects comes amid an overall among ETF investors to safer funds while risker investments have seen investors withdraw cash.