Stock-bond correlations shift and AI fuels market concentration
Today’s portfolios today are structurally riskier, as stock and bond correlations have turned persistently positive, eroding the buffer these asset classes historically provided.
That’s one of the key takeaways from the Fall 2025 RBC iShares ETF Implementation Guide, which says current conditions signal a new reality for portfolio construction where traditional diversification strategies may no longer deliver the protection investors once relied upon.
BlackRock analysts argue this is not a temporary blip but a regime change driven by “persistent inflation dynamics, policy action and fiscal imbalances.”
Market concentration is also a growing concern with the dominance of US tech and AI leaders boosting index performance but also elevated valuations and narrowed sources of growth. While earnings strength underpins US equities, the report notes that a selective approach is critical.
“We see that the labour force is moderating,” says Russ Koesterich, portfolio manager with the Global Allocation team. “We see that consumption is moderating. It's not collapsing. And with some pro-cyclical factors kicking in in the back half of the year, we do think we're going to be in an environment that rewards secular growers rather than hiding in some of the defensive names.”
Canadian equities have rallied on strength in energy and mining, though trade-related sectors face pressure from new tariffs. Advisors are advised to focus on high-quality dividend-paying companies that can weather near-term headwinds.
International equities are emerging as more effective diversifiers than US small caps as year-to-date, developed market equities have outpaced US benchmarks in CAD terms, supported by structural reforms in Europe and corporate governance improvements in Japan.
“Lower correlation and corporate reforms in certain parts of the world suggest that most investors could benefit unconditionally from owning more international stocks and seeking alpha in international markets as well as the US markets,” says Phil Hodges, co-lead of Systematic Equities Macro Group.
On fixed income, both the Fed and BoC are expected to move cautiously with easing and BlackRock’s preference is for the “belly” of the curve, paired with short-term corporates to balance carry and diversification. Credit remains appealing, particularly BBB-rated corporates, though caution is urged on riskier high yield.
Allocations to commodities, gold, digital assets, and liquid alternatives are on the rise.
“Investors are diversifying beyond traditional bonds, seeking strategies that blend income, risk management, and long-term growth potential,” says Robert Fisher, senior portfolio manager, Systematic Active Equities.
