The U.S. economic outlook has improved considerably in recent weeks. But with U.S. stocks selling at historically expensive valuations, we think high yield bonds may offer an attractive alternative for investors.

Recession concerns have eased considerably since April, as illustrated by recent trends on Polymarket, an investor prediction market. 
As recently as May 1st, Polymarket participants saw a 65% chance that the U.S. economy would fall into recession in 2025. But since then, the Trump administration’s trade rhetoric has cooled considerably, and its most severe tariff scenarios appear to be off the table.
Additionally, as Trump’s “One Big Beautiful” tax bill nears finalization in Congress, it has become clear that fiscal austerity will not be a priority. As a result, Polymarket now sees only a 26% chance of a U.S. recession this year.

But it is important to recognize that economic growth expectations have not improved significantly since early May. As of late June, the consensus in the Bloomberg Survey of Economists was that U.S. GDP would rise only a meager 1.4% in 2025.

Sluggish U.S. growth appears likely for several reasons. Even without the more extreme scenarios, the Trump tariffs almost certainly will have a negative economic impact.
The level of fiscal stimulus provided by the tax bill is likely to be relatively modest, and the U.S. housing market remains heavily burdened by high mortgage rates.

Despite the modest growth consensus, the S&P 500 Index is expensive and U.S. earnings estimates remain extremely optimistic. 
As of June 24th, S&P 500 earnings per share, or EPS, were projected to grow 11.1% over the next 12 months, despite rising only 9.2% over the previous 12 months. 

Meanwhile, the earnings multiple being placed on those estimates is quite elevated. As of June 24th, the S&P 500 was selling for 21.6 times expected next-12-month earnings. This was near the highest level reached during the past 20 years and almost five points above the 10-year median.
This combination of high valuations and optimistic earnings expectations could make for a difficult setup for U.S. stocks over the coming year, especially if the slow-growth scenario that economists are predicting comes to pass. 

High yield bonds are a possible alternative for investors seeking attractive return potential but less downside exposure compared to stocks.

While high yield bonds are unlikely to keep pace with stocks if U.S. economic growth proves surprisingly robust, they currently feature yields that appear very attractive relative to recent history—both on an absolute basis and relative to stocks.

As of June 24th, the Bloomberg U.S. Corporate High Yield Bond Index offered a 7.3% yield to worst—a measure that takes into account potential call dates and other provisions that could reduce returns to investors.
That was an attractive yield in isolation, but appeared even more attractive when compared to the 4.6% earnings yield on the S&P 500. Such an unusually large yield gap is rarely seen outside of periods of significant economic distress.
Even if we eliminate the influence of the rather expensive group of mega-cap technology stocks commonly known as the Magnificent Seven, the S&P 500 earnings yield was still only 5.3%.  

If  a surprisingly negative economic scenario were to unfold, high yield bonds could pose significantly less downside risk for investors than U.S. stocks, as historically they have tended to experience lower drawdowns than stocks in down markets. 

We can quantify this tendency by looking at the downside capture ratio, which compares returns only during periods of negative performance. Based on this metric, over the 30 years ended May 31, 2025, the Bloomberg U.S. Corporate High Yield Bond Index experienced only 36% of the downside loss on the S&P 500 in months when S&P returns were negative.
The upside potential for U.S. stocks could be limited given that historically high earnings multiples are being awarded to some very optimistic earnings projections, despite a tepid U.S. growth outlook.
Meanwhile, U.S. high yield bonds currently offer yields averaging above 7% and historically have experienced only a bit more than one-third of the downside of stocks.  
As a result, the T. Rowe Price Asset Allocation Committee currently has an underweight position in U.S. stocks but a corresponding overweight position in high yield bonds. We believe this combination potentially offers a more attractive risk/return trade-off over the near term.