BofA strategists have issued a stark warning in their latest research report, stating that the traditional "60/40" portfolio strategy—long considered the golden rule of investing—faces exceptionally weak return prospects over the next decade.
The bank forecasts that the classic portfolio, consisting of 60% stocks and 40% bonds, will deliver a real return of less than 1% after inflation next year. More alarmingly, their models suggest an annualized real return of -0.1% over the next ten years, meaning long-term investors adhering to this strategy could face substantial asset erosion.
The primary reason for this bleak outlook lies in the expected underperformance of U.S. large-cap stocks. BofA notes that U.S. large caps have delivered strong annualized returns exceeding 15% for three consecutive years, but historical data shows that such high-growth cycles are typically followed by significantly lower-than-average returns. Strategists argue that unless there are unexpected surprises in GDP and EPS growth, investors may struggle to avoid a seventh "lost decade."
Given the uncertain return expectations for core assets, BofA recommends investors adjust their allocations and look beyond conventional holdings to "satellite" assets. The report highlights six alternative investment avenues—including international small- and mid-cap stocks, high-yield bonds, emerging market assets, and gold—to seek alpha in a low-return environment.
**Equities: Focus on International Small/Mid-Caps and Quality Stocks** For equity allocations, BofA suggests shifting away from overvalued U.S. large caps toward international markets and specific style factors.
The report particularly favors international small- and mid-cap stocks, which have delivered 15% annualized returns over the past five years—matching U.S. large-cap growth stocks. However, BofA strategists emphasize that international small/mid-caps exhibit lower downside volatility, faster earnings growth, and more attractive valuations.
Additionally, BofA recommends focusing on "quality U.S. stocks"—companies with strong financials and low debt levels. Analysis of data since 1996 shows that quality stocks have consistently outperformed other major style factors, including momentum, growth, value, dividend, and small-cap strategies.
**Fixed Income: High-Yield Bonds and Emerging Market Opportunities** In fixed income, BofA sees greater potential in credit opportunities than traditional rate-sensitive bonds.
Strategists highlight U.S. high-yield bonds as offering the best opportunities in credit markets. Compared to loans or private credit, high-yield bonds boast higher asset quality and sufficient duration to benefit from the Fed’s easing cycle. Current U.S. high-yield loan default rates hover around 2.6%, below those of private credit and syndicated loans. BofA expects high-yield bonds to outperform investment-grade debt next year.
Emerging market fixed income also garners attention. Over the past three years, this asset class has outperformed both U.S. and global bonds while offering higher yields. Notably, portfolios combining high-dividend EM equities have delivered annualized returns of 9%–12% over five years, far exceeding the MSCI Emerging Markets benchmark’s 5% return. With 2026 expected to be a year of monetary easing in EM, local debt and high-dividend stocks could continue outperforming.
**Real Assets & Thematic Plays: Bullish on Gold** For real assets, BofA projects gold prices could rebound to $4,538 per ounce next year—an 8% upside from current levels. Strategists believe the drivers behind this year’s gold rally—including strong central bank demand and widening fiscal deficits—will persist.
In commodities, BofA has previously stated that robust U.S. growth, fiscal and monetary stimulus, and potential inflationary pressures could make commodities one of the best investments in 2026.
The report also identifies three long-term thematic opportunities: AI & technology, U.S. industrial revitalization, and uranium resources.
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