The trouble with a market relationship that works for two decades is that investors begin to treat it as a permanent arrangement. Stocks provide growth, bonds offer protection, and holding both appears to settle the diversification question. But the assumption that equities and bonds reliably move in opposite directions owes more to a particular economic environment than to any enduring rule of investing.

The simultaneous losses in stocks and bonds in 2022 did not overturn a century of market experience. They marked the end of an unusually long period in which investors had become accustomed to something different. As the IMF noted in early 2026, stock-bond diversification has become more challenging because both asset classes frequently fall together during sharp selloffs.

Over the past century, negative stock-bond correlation has been the exception rather than the rule. It featured after the 1929 market crash, during the post-war period and, most persistently in recent experience, between 2000 and 2020. That last stretch was long enough to make a useful relationship look dependable.

The post-financial-crisis easy-money era reinforced the expectation. Under the “risk-on, risk-off” playbook, Treasuries served as safe havens while equities carried the risk. Investors could look to government bonds for protection when sentiment turned against stocks. That playbook has become less reliable as inflation and growth expectations reshape the relationship.

Inflation Matters
The distinction starts with the reason markets are moving. When inflation is low and stable, weak growth hurts corporate earnings but also creates room for central banks to cut rates. Stocks suffer while bonds benefit. The hedge works because the same economic development has different consequences for the two asset classes.

An inflationary shock changes that calculation. Central banks may need to tighten policy even as growth weakens. Higher interest rates weigh on bond prices and reduce the present value of future corporate earnings. Both assets can fall together, leaving a portfolio exposed on both sides.

Yet inflation is not automatically bad for equities. When higher prices accompany robust real growth, corporate revenues and earnings can expand, supporting share prices. Bond yields may rise at the same time as investors demand compensation for stronger activity and higher inflation. The important distinction is between inflation accompanied by growth and inflation that undermines it.

That is also why earnings remain central to the equity outlook for 2027. Global earnings momentum is expected to slow from unusually strong levels but remain above historical averages. Market strength has broadened beyond US mega-caps, while AI-driven capital spending has supported corporate margins. Higher Treasury yields, elections and geopolitical tensions may bring more volatility, but earnings growth remains the foundation of long-term equity returns.

Real Assets
The inflation backdrop also helps explain the strength of real assets. Post-pandemic inflation has risen to roughly 4% annually, compared with 2.6% in the 2000s and less than 2% in the 2010s. Supply shocks, deglobalisation and energy disruptions have contributed to that shift.

Real assets have delivered annualised returns of 12.8% this decade, against roughly 7% for a traditional 60/40 portfolio. Their performance has been supported not only by inflation but also by spending on infrastructure, defence, onshoring and AI capacity.

The relationship with equities again depends on what is driving the gains. Strong real asset performance can accompany robust nominal growth and corporate pricing power. Companies able to pass higher costs on to consumers can sustain earnings, with energy, materials and real estate investment trusts benefiting from that environment.

But a rise in real assets does not mean equities must follow. In a cost-push or stagflationary environment, higher prices are not matched by stronger growth. Real assets may continue to perform while companies struggle with the consequences. Inflation supports equities only while the growth and earnings outlook can withstand it.

Dollar Dynamics
The dollar adds another dimension. Strong nominal growth and investment in US equities, infrastructure and AI capacity can attract global capital, reinforcing demand for the currency. Higher US yields provide another source of support, while the dollar retains its central role in global trade settlement.

In an inflationary regime, positive stock-bond correlations can therefore coincide with a stronger dollar. Investors may seek dollar exposure as real assets rise, while the Federal Reserve’s willingness to keep interest rates higher to contain inflation supports the currency relative to its peers.

The dollar can also find support in a very different environment. When real assets weaken and growth and inflation expectations fade, US yields typically fall. Yet investors may still seek safety in US Treasuries and other dollar-denominated assets. The currency’s safe-haven appeal can support it even when interest rates are low.

These relationships leave investors with a less convenient framework than a permanent hedge, but a more useful one. Stocks, bonds, real assets and the dollar respond to inflation, growth and monetary policy in different combinations.

A portfolio built around the experience of 2000–2020 risks treating the conditions of those years as a promise about the next decade.

Diversification remains essential. The challenge is ensuring your portfolio is built for the regime ahead, not the one left behind.