Beyond the 60/40 mix: 3 reasons to consider alternatives

One week after the Federal Reserve resumed its cutting cycle, market momentum cooled—but the economy didn’t. Across the week, the S&P 500, S&P 500 equal-weight and S&P 400 declined; U.S. Treasury yields were a bit higher across the curve; and the U.S. dollar strengthened—a mild cool-off in animal spirits.

Then came stronger-than-expected data. Two prints stood out:

• Growth revisions surprised to the upside: Q2 GDP came in at 3.8% in the third estimate versus 3.3% expected. Although trade swings can nudge the headline around, this upgrade was mostly about stronger consumer spending (+2.5% versus 1.7%)—in short, the consumer remains solid.
• The jobs market is holding up: Initial and continuing claims came in below forecasts—evidence of a labor market that has slowed, not cracked.

Bottom line: A bit of good-news-is-bad-news. Firmer growth risks stickier inflation and a shallower, slower pace of cuts. That said, investors are still pricing one to two more cuts this year—and we agree. The Fed remains driven by incoming data, with risks on both sides.

With that backdrop—and picking up where we left off—we continue to roll through the Fed-cutting playbook: 1) embrace carry in fixed income; 2) position for risk-asset outperformance; 3) diversify internationally; 4) use alternatives to add durable return. Today, we focus on alternatives.

With stocks near record highs and bond yields still elevated by recent standards, why consider alternatives to a traditional 60/40 portfolio as the Fed cuts rates? We can think of three reasons:

1. Fed cuts amid sticky inflation raise the risk of higher stock-bond correlation.

The Fed resumed its rate-cutting cycle last week, and expectations are for more cuts ahead. With inflation above 2.5% and easier financial conditions taking hold, the risk of stickier, more volatile inflation increases. What does this mean for investors? Inflation above 2% often causes stocks and bonds to move in tandem, making diversification even more important. We believe investors need to look beyond just stocks and bonds to build resilient portfolios.

Our take: We’d lean on two sleeves to enhance diversification:

• Hedge funds—A second engine that can profit from moves in rates, currencies and commodities even when stocks and bonds move together. In a 60/30/10 mix—in which 10% is allocated to hedge funds—they’ve beaten a 60/40 portfolio about 70% of the time over the past decade, and every year since 2021 as inflation picked up, aided by higher short rates, wider stock dispersion and more idiosyncratic opportunities.
• Infrastructure—Real, often inflation-linked, cash flows via regulated tariffs and long contracts. Global core infrastructure has annualized ~8%–12% across different inflation regimes, supported by long-term, inflation-resilient revenue streams.

2. A few giants dominate the stock market, and many new growth stories are still private.

The top 10 stocks now account for about 40% of the index and have driven most of this year’s earnings growth. Even if that’s justified, it’s a level of concentration worth noting. In this environment, selectivity matters—and, as always, diversification is key. That’s why we’re also paying close attention to the secular, longer-term trends unfolding in private markets.

Unlike the internet era, when public investors captured significant value post-IPO (Google IPO’d at ~$23 billion, now ~$3 trillion market cap), companies today are staying private much longer. The median tech IPO is now ~14 years old with ~$220 million in sales compared to ~7 years, and below $20 million in the late 1990s. In fact, today’s top private companies (SpaceX, ByteDance, OpenAI) would already rank among the top 30 S&P 500 companies by market cap if they were public.

Three main reasons drive this trend:

• Access to capital. Private markets are flush with capital—global private equity AUM is expected to double to over $25 trillion, about 70% of the market cap of the Nasdaq. There are also more exit options than IPOs alone; 60% of U.S. VC exits are through acquisitions or buyouts.
• Innovators’ desire to avoid public markets’ short-term focus and regulatory burden. The regulatory and reporting requirements of going public, combined with the short-term orientation of listed markets, have reinforced the appeal of private capital.
• Speed of innovation, especially in AI. The pace of innovation in AI is unprecedented, and the ultimate winners may not yet exist. Building lasting value requires patient, strategic capital—more likely found in private markets.

Our take: With public markets more concentrated than ever, considering private equity is key for diversification and tapping into long-term secular trends.

Private markets continue to provide access to companies that are remaining private longer and growing larger. While private equity has faced challenges recently—such as public markets outperforming most managers since 2022 and a slowdown in fundraising— as deal activity recovers, we believe private equity is well positioned to benefit in the next phase of growth.

3. Easier financial conditions boost private market activity.

History shows a clear link: When financial conditions ease—rates fall, credit spreads narrow and markets stabilize—deal activity tends to pick up. Right now, the mix of interest rates, credit spreads, stock prices, the U.S. dollar and market volatility in the Fed’s Financial Conditions Index points to a meaningful ~50-basis-point lift to GDP over the next year. Reflecting these conditions, we’ve already seen some pickup in activity this year: 221 IPOs have been announced in the United States, and over 1,100 globally. The U.S. IPO Index is up 11% since June 30, outpacing the S&P 500’s 4%. As conditions continue to improve, we expect deal activity to ramp up further.

Our take: Easier financial conditions set the stage for more deals, larger transactions and stronger market performance—a trend we expect to continue.

For private equity and venture capital, this environment creates a more attractive exit window: Portfolio companies can go public at higher valuations with stronger aftermarket support, and strategic buyers face cheaper financing, making trade sales more achievable.

To sum it up, in today’s environment of sticky inflation, higher stock-bond correlations and concentrated public markets, building resilient portfolios means looking beyond the traditional 60/40 mix. We see opportunity in alternatives—not just for diversification, but also for access to long-term secular trends and dealmaking momentum as financial conditions ease.