Index funds have delivered solid year-to-date returns through the first half of 2026, with the S&P 500 gaining approximately 10 percent as of early July, prompting financial advisors to recommend portfolio rebalancing to manage risk heading into the second half of the year.
According to Morningstar’s mid-year analysis published June 3, US stocks have put up strong returns despite concerns about war, inflation, valuations, and the potential risks posed by artificial intelligence to various industries. The performance has been broad-based, with smaller companies outpacing their larger counterparts; both small-growth and small-value stocks have outperformed large-cap stocks in 2026.
The standout issue for many investors is bonds. US bond index funds have lagged significantly, returning just 1.1 percent year-to-date through June 26, according to Morningstar data. This gap has widened the divide between stock-heavy and balanced portfolios, creating an imbalance that advisors say warrants attention.
Morningstar portfolio strategist Amy Arnott emphasized the core purpose of rebalancing: “The main reason for rebalancing is to control risk, not necessarily to improve returns.” Younger investors with decades until retirement may take a hands-off approach, checking in only if their asset mix drifts significantly from targets. But those within 10 to 15 years of retirement face greater pressure to rebalance regularly and ensure their portfolios remain on track for their goals.
For investors looking to rebalance in mid-2026, Morningstar recommends focusing on bonds. If stock gains have pushed your portfolio heavier in equities than intended, restoring balance by adding to existing bond holdings or purchasing new bond funds can help stabilize risk levels. Intermediate core bond and intermediate core-plus bond funds—which invest largely in investment-grade US fixed-income securities and maintain moderate interest-rate sensitivity—are among the most popular choices for this purpose.
The broader context matters. Over the trailing three years, US stocks have returned 74.4 percent while bonds have returned just 13.0 percent, according to Morningstar. This long-term outperformance of stocks explains why many portfolios have drifted toward higher equity allocations than their owners intended. Mid-year offers a natural checkpoint to realign holdings with target risk levels before market conditions shift again in the second half of the year.
Sources
- Morningstar — mid-year portfolio rebalancing guidance, asset-class returns data as of June 26, 2026, and commentary from portfolio strategist Amy Arnott
- S&P Global — S&P 500 year-to-date return data as of July 9, 2026
