The benefits of diversification have been on display so far in 2025. International stocks are having a moment, significantly outperforming U.S. stocks after a decade and a half of underperformance. Additionally, bonds resumed their role of providing defense in volatile equity markets when stocks fell during April and early May. At the current level of interest rates, we believe bonds are likely to offer higher returns over the next five years than they have over the last five and are likely to help buffer portfolios when stock markets get choppy.
We are also seeing the benefits of diversification when examining the performance of the U.S. stock market more closely. A few large companies (mostly technology companies) powered most of the market’s gains over the last decade and a half. The first half of this year has bucked that trend. Technology companies have not led the way, and the market is being led by sectors that have lagged over the last several years, such as industrials, financials, and utilities. In our view, this trend is likely to continue. We believe that this environment of a broadening market warrants a well-diversified portfolio and should present opportunities for active stock pickers.
