Policy, Buildouts, and Bottlenecks to Shape Markets in the Second Half
The LPL Strategic & Tactical Asset Allocation Committee (STAAC) determines the firm’s investment outlook and asset allocation that helps define LPL Research’s investment models and overall strategic and tactical investment thinking and guidance. The committee is chaired by the chief investment officer and includes investment specialists from multiple investment disciplines and areas of focus. The STAAC meets weekly to closely monitor all global economic and capital markets conditions to ensure that all the latest information is being digested and incorporated into its investment thought.
Key changes from STAAC in June:
- Updated 2026 S&P 500 fair value target range to 7,650–7,750
- Updated 2026 S&P 500 earnings per share forecast to $320
- Updated 2026 10-year Treasury yield target range to 4.00–4.50%
Investment Takeaways
Major averages capped the first half on a mixed note, with the Dow Jones and small cap Russell 2000 gaining ground, while the S&P 500 and Nasdaq fell slightly in June. Nonetheless, the S&P 500 logged its best quarterly result since 2020, with a 15.2% total return, and sealed double-digit gains for the first six months of 2026. After posting fresh records earlier in the month, the equity benchmark was weighed down by falling Magnificent Seven and big tech names, broadly credited to overheating technical indicators as well as a source of funds for the SpaceX (SPCX) initial public offering. As such, the equal weighted S&P 500 outpaced the traditional market cap weighted index by around 3% amid a broadening under the surface and easing geopolitical tensions following the interim U.S.-Iran truce.
Core bonds edged higher for a second straight month, measured by a 0.2% rise in the Bloomberg U.S. Aggregate Index (Agg). Treasuries outperformed on the margins with a 0.3% advance as the yield curve flattened with easing inflation expectations leading longer-dated yields lower, while the short end of the curve was pressured higher by a decidedly hawkish Federal Reserve (Fed) hold and resilient economic data leading traders to price in tighter monetary policy. Meanwhile, corporate bonds and mortgagebacked securities (MBS) rose, slightly underperforming the Agg.
Looking ahead, an improving but still challenging macro backdrop and AI-driven earnings strength will continue to be the key pillars of support that may help the broader equity advance continue through year-end. We expect modest equity market gains in the second half and maintain a moderate equity overweight to take advantage, while staying diversified between the AI theme and potential rotation beneficiaries.
In fixed income, sticky inflation and resilient growth are likely to keep the Fed on an extended pause, leaving Treasury yields rangebound, with the 10-year expected to finish the year between 4.00% and 4.50%. In this environment, bond market returns may remain primarily driven by income, and we favor owning core bond sectors over lower quality riskier sectors.
The STAAC’s recommended tactical asset allocation includes:
- A modest overweight stance toward equities, with a preference for U.S. for resilient economic growth, AI innovation, and relative insulation from possible additional energy shocks.
- Balanced Style Exposure. Despite strong earnings on the growth side, the risk of technology disappointments has risen.
- Industrials. Strong earnings momentum, a favorable technical backdrop, and more balanced way to play AI buildout.
- Energy. Oil prices may remain higher for longer given the ongoing disruption to tanker traffic in the Strait of Hormuz. The sector offers a desirable hedge against potential additional energy disruptions and delays restoring global production.
- Within fixed income, the Committee continues to believe the risk/reward favors owning core bond sectors over the riskier sectors.
- Within taxable markets, with yields still elevated, particularly for high-quality sectors within the fixed income universe (Treasuries, MBS and shorter-maturity corporates), income opportunities remain attractive.
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IMPORTANT DISCLOSURES
Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy. Precious metal investing involves greater fluctuation and potential for losses.
Earnings per share (EPS) is the portion of a company’s profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company’s profitability. Earnings per share is generally considered to be the single most important variable in determining a share’s price. It is also a major component used to calculate the price-to-earnings valuation ratio.
Gross Domestic Product (GDP) is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.
All index data from FactSet.
The Strategic and Tactical Asset Allocation Committee (STAAC) is a division of LPL Research.
RES-0007126-0526 | Tracking #1135392 | #1135393 (Exp. 07/2027)