High-Yield Bonds Outperform Stocks in Slow-Growth Periods, Study Finds

As a wave of economic news floods the markets, stocks continue to flirt with record highs—even as investor confidence in the economy begins to fade. Amid this uncertain backdrop, a new analysis from AllianceBernstein suggests that investors may not need to sacrifice returns to lower their portfolio risk.

According to portfolio managers William Smith, director of credit, and AJ Rivers, head of U.S. retail fixed-income business development, high-yield corporate bonds, often called “junk bonds,” deserve a closer look as a smart alternative to equities.

“Investors who want to stay invested but reduce exposure to higher-risk stocks often turn to investment-grade bonds,” they write. “While government and high-quality credit assets are important in a diversified portfolio, high-yield bonds may be particularly attractive in today’s market.”

Solid Returns with Lower Volatility

Over the past 25 years, high-yield bonds (tracked by JNK) have generated average annual returns of 7.6%, compared to 9.8% for the S&P 500 (SPX)—but with roughly half the volatility.

“By reallocating a portion of equity holdings into high yield, investors can meaningfully reduce overall volatility while giving up relatively little in returns,” the report notes. “Given today’s elevated yields and slower economic growth, the trade-off looks more favorable than usual.”

Why High Yield Wins in Weak Economies

In periods of sluggish growth, high-yield bonds have often outperformed equities. Historically, high stock valuations—reflected in lofty price-to-earnings ratios—tend to lead to below-average returns. With global demand cooling and trade activity softening, the timing could be ideal to shift into high yield, according to AllianceBernstein’s analysis.

The Trade-Off: Two Key Risks

Still, this strategy carries its own risks.

• Recession exposure: If the U.S. economy slides into a downturn, high-yield bonds could lose value. During the 2008 financial crisis, they fell 5%, and during the 2020 COVID slump, they dropped 8%—less severe than equities, but worse than government bonds, which posted gains in both episodes.
• Stronger-than-expected growth: If the economy avoids a slowdown—possibly boosted by advances in artificial intelligence—stocks may outperform high yield, leaving bond investors trailing.

The Bottom Line

For investors seeking to dial down risk without stepping completely out of the market, high-yield bonds offer a compelling middle ground—providing solid income potential, moderate volatility, and resilience in slower-growth environments.