Higher Rates, Higher Hurdles
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 August:
- No Changes
Investment Takeaways
The S&P 500 snapped back-to-back monthly losses with a healthy 2.6% advance in August, led by the natural resources and technology sectors. Stocks rallied early in the month as risk sentiment received a lift during a blockbuster second quarter earnings season and a cleaner positioning setup following July’s momentum unwind. Artificial intelligence (AI) bellwether NVIDIA (NVDA) concluded the stellar reporting season with a blowout 2027 revenue forecast. However, the theme saw a succession of sell-offs and rebounds as headlines shifted between compute demand, upbeat revenue guidance, and expanding spending plans versus datacenter pushback, circular financing, and supply constraints. Otherwise, a hawkish-tilted Jackson Hole speech and mixed economic data kept a lid on equity market gains.
Core bonds, measured by the Bloomberg U.S. Aggregate Index (Agg), added 0.4% in August. Rates markets faced quite a bit of noise last month as 30-year Treasury yields briefly touched their highest level since 2007 after the Treasury Department announced increased buyback plans following a meaningful run-up in yields. Nonetheless, front-end yields saw the largest monthly rise after climbing in response to Federal Reserve (Fed) Chair Warsh expressing his dedication to taming sticky inflation. Corporate and mortgage-backed securities (MBS) outperformed the Agg.
Looking forward, LPL Research expects that an improving but challenging macro backdrop and AI-driven earnings strength will remain key pillars of support that may help the broader equity advance continue through year-end. STAAC maintains a moderate equity overweight recommendation while staying diversified across the AI theme and potential rotation beneficiaries. As September begins and midterm elections approach, a pickup in volatility is expected during a historically challenging seasonal period.
In fixed income, sticky inflation and resilient growth are likely to keep the near-term path of Fed policy less certain, leaving Treasury yields range-bound, 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 high-quality U.S. equities backed by resilient economic growth, AI innovation, and relative insulation from possible additional energy shocks.
- Balanced Style Exposure. Despite strong earnings on the growth side, the bar for technology remains high and our technical analysis work suggests at least market-weighting in the value style.
- Favor industrials. Earnings momentum remains strong for this AI buildout beneficiary, although recent underperformance warrants attention as the sector tests key support levels.
- Energy. Oil prices may remain higher for longer given ongoing disruptions to tanker traffic in the Middle East. The sector offers a desirable hedge against potential additional energy disruptions and delays in 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.
Click here to download a PDF of this report.
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 #1171533 | #1171535 (Exp. 09/2027)