U.S. equities fell -3.87% in Q1. Uncomfortable indeed, but not yet considered a correction – typically defined by a 10% decline from market peak. What's more telling is what failed alongside equities: bonds.
For decades, the diversified portfolio rested on the assumption that when equities fall, bonds rise. Q1 delivered a reminder that this relationship is not guaranteed as spreads widened and the yield curve steepened. Investors who leaned on fixed income for protection took losses on both sides.
Geopolitics pulled the trigger: a sharp selloff in late February tied to escalating conflict in the Middle East accelerated the drawdown. But, upon reflection, a deeper vulnerability was already there as U.S. equity valuations entered 2026 above historical averages.
What performed well in Q1? Gold and real assets.
Q1 may mark a structural challenge for investors, as the two-asset diversification model is less dependable than it was in the decade before 2020.
Building resilient portfolios today means looking beyond just stocks and bonds and encouraging investors to also consider commodities, real assets, market-neutral strategies, and other liquid return sources as they continue to diversify their portfolios.
Allocators and advisors: has the bond-equity correlation breakdown changed how you're constructing portfolios in practice or are most clients still anchored to 60/40?
Source: V-Square Quantitative Management LLC, Bloomberg, MSCI, and S&P Global. Total returns shown for the period 12/31/2025 through 3/31/2026. The chart shows the dollar spot price of Gold, the MSCI USA All Cap Index as a proxy for US Equities, MSCI ACW ex USA Index as a proxy for International Equities, S&P Real Assets Index as a proxy for Real Assets, Bloomberg Global Aggregate Index as a proxy for U.S. Bonds, and Bloomberg Global Aggregate ex-USD Index as a proxy for Global Bonds. All indexes are shown with returns in the U.S. Dollar. Other indexes are available.
This chart is for illustrative purposes only. Other indexes are available. It is not possible to invest directly in an index. Index returns do not reflect any management fees, transaction costs or expenses. Past performance does not guarantee future performance. The information and opinions contained herein are for informational purposes only, do not purport to be full or complete, do not constitute investment advice and may not be relied on. For more information, please see vsqm.com/disclaimer.
