PIMCO, the 'King of Fixed Income': Gold prices may rise 10% in the next year, value stocks have potential for a comeback

The global market in 2025 is lively yet uneasy!

U.S. stocks continue to rise, gold hits new highs, but cash yields are declining and credit pressures are increasing, presenting a rare structure of prosperity and hidden worries in the market...

At this cyclical juncture, where the surface looks bright but the underlying conditions are diverging, there is a greater need for an "observer" who can understand the dark lines of interest rates, debt, and credit.

This time, we turn our perspective to PIMCO, one of the world's largest active fixed income management institutions with over $2.2 trillion in assets under management.

Zhitang has obtained the 2026 market outlook report from this international asset management giant, finding that the institution's judgment logic is not primarily about the rise and fall of major assets, but rather providing investors with a "coordinate system" for the cycle.

Zhitang summarizes the key points of this report as follows for readers.

Value Stocks: Potential for Mean Reversion

After years of tech-driven gains, U.S. stocks enter 2026 with valuations still close to historical highs. Although AI investments continue to support economic growth and market optimism, returns are concentrated among a few tech giants, raising questions about sustainability.

The tech industry was once known for capital efficiency, but it has now entered a more capital-intensive phase. AI-related spending has primarily relied on free cash flow in the past, but is increasingly dependent on debt financing. Additionally, another noteworthy spending trend is the cyclical transactions between ultra-large cloud service providers and chip manufacturers, involving billions of dollars, which further amplifies specific risks in the industry.

However, the situation beneath the surface is more complex.

For example, value stocks remain attractive compared to historical averages, suggesting potential for mean reversion over time.

The macro environment may favor value stocks in the short term. If the U.S. economy shows trend growth, it will help various industries achieve broader profit growth in 2026.

Cash: Not a Strategic Choice

PIMCO believes that investors holding too much cash are missing out on potential opportunities.

During the post-pandemic period of high inflation and Federal Reserve rate hikes in the U.S., abnormally high returns attracted investors to allocate funds to cash.

However, the current rate-cutting cycle brings opportunity costs and reinvestment risks, as cash positions are continuously being shifted into lower-yielding investment instruments.

As the yield curve steepens, cash yields have declined relative to bonds of various maturities. Bonds provide investors with the opportunity to lock in more attractive yield levels over a longer time frame.

When interest rates decline, cash yields decrease, but bonds typically appreciate, enhancing total return potential. Given the current yield levels, high-quality bonds appear attractive across various possible economic scenarios.

Global Bonds: The Stock-Bond Teeter-Totter Effect Reappears

As inflation falls closer to central bank targets, global bonds once again provide diversification opportunities through their traditional negative correlation with stocks, helping portfolios withstand shocks during stock market pullbacks.

Investors can also benefit from the current abundance of fixed income investment opportunities globally, obtaining attractive real and nominal yields in both developed and emerging markets, such as the UK, Australia, Peru, and South Africa. We believe that diversifying across different regions and currencies is an effective way to source differentiated returns and strengthen portfolios When interest rates decline, PIMCO recommends shifting cash positions to high-quality bonds to lock in yields and gain potential capital appreciation, with a focus on 2 to 5-year bonds.

Gold: Potential Increase of 10% in the Coming Year

Recently, gold prices have surged significantly, once breaking through $4,300 per ounce, attracting considerable market attention. Even in an overall risk-on market environment, gold prices have reached historic highs. The demand from investors for inflation protection, geopolitical hedging, and diversifying dollar risk has further solidified gold's position as a strategic asset.

The value of gold currently held by central banks has surpassed that of U.S. Treasury bonds, reflecting a structural shift in foreign exchange reserve management.

PIMCO believes that gold prices could rise by more than 10% in the coming year.

However, the recent rise in gold prices is driven not only by fundamentals but also by momentum and liquidity, and a short-term pullback remains possible.

PIMCO advises investors: Although declining interest rates reduce the opportunity cost of holding gold, its valuation appears high relative to real yields, thus careful management of its allocation in the portfolio is necessary.

Commodities: Allocating to Them Equals Participating in AI Investments

Since 2020, the returns of commodity indices have been comparable to global equities but with lower volatility, reinforcing their role as a diversification tool and inflation hedge. Historical data shows that even a moderate allocation to commodities can enhance portfolio efficiency, especially when inflation is slightly above central bank targets.

PIMCO advises investors: A broad investment in commodities can also serve as another way to participate in the AI investment theme, as infrastructure demand drives the need for raw materials such as copper, lithium, energy, and strategic assets like rare earths.