Vanguard: bonds will outperform stocks over next decade

You’re undoubtedly aware that stocks outperform bonds over the long term. 

One hundred dollars invested in the S&P 500 in 1928 was worth almost $983,000 at the end of 2024 (including dividends). Meanwhile, $100 invested in 10-year Treasury bonds was worth only a bit more than $7,000, according to NYU finance professor Aswath Damodaran.

The basic reason for the disparity is that stocks reflect growth in corporate earnings, while bonds just reflect the cost of borrowing.

But there have been long stretches when bonds outperform stocks. The period from 2000-2020 was one of them. The S&P 500 scored a 5.4% annualized return during that time, trailing the 8.3% return of Treasury bonds with maturities of 10 years and up, according to Jeff Sommer of The New York Times.

Those results came after the Internet stock bubble crested in 2000 and amid the slide of interest rates that stemmed from tame inflation and economic growth.

Vanguard’s outlook for the next 10 years

Esteemed money-management colossus Vanguard thinks the next 10 years will be another period when bonds outperform stocks. For equities, it sees the MSCI US Broad Market Index (including dividends) returning an annualized 2.9% to 4.9%. And it predicts the Bloomberg US Aggregate Bond Index will return 4.7% to 5.7%.

Vanguard senior economist Kevin Khang offers three reasons why it may be better to invest in bonds over stocks now.

1. Equities may be overvalued. “After years of macroeconomic resilience that kept recession at bay, and earnings-driven stock market appreciation, [stock] valuations are at a point that prices in very little downside risk,” he wrote in a commentary. The low risk premiums embedded in current stock valuations make the market vulnerable to downturns, especially if there’s a recession or financial turmoil.

Bonds are now at fair value

2. Bonds, on the other hand, appear fairly valued, providing “a much better balance” of risk and returns, Khang said. Treasury bonds now offer a 4% to 5% return, in the middle of their historical range. And even if interest rates increase slightly, perhaps due to inflationary pressure from tariffs, long-term bond investors benefit, he said. That’s because they can reinvest at higher yields. The stability of income for bonds makes them “a compelling alternative to the prospective volatility of equities.”

3. Finally, bonds allow you to stay invested in equities during any environment, Khang said. “After years of stock market outperformance, many investors tend to be over-allocated to US equities,” he said. “Investors may benefit from recalibrating their stock-bond mix to a level so that their fixed income can act as an effective ballast during times of unforeseen” stock declines.

You can gain exposure to bonds through exchange-traded funds. If you want corporate bonds, which yield more than Treasuries but are also less safe, the biggest corporate bond ETF is Vanguard Intermediate-Term Corporate Bond ETF (NASDAQ: VCIT). It has $51 billion of assets.

Predicting markets 10 years out is a difficult endeavor, but it may indeed make sense to balance your trading and investment in stocks with an exposure to corporate bonds.