Beyond the Midterms: Investing Through an AI Recalibration
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 September:
- No Changes
Investment Takeaways
Stocks finished mixed in October with the S&P 500 logging a modest 0.9% loss, remaining in its three-month range. After hitting its first all-time high since August, the equity benchmark was dented as the market narrative began shifting to artificial intelligence (AI) financing concerns following signs of credit stress and mounting capital needs. Semiconductors dropped in eight straight sessions through mid-month, and a rebound was later challenged by big tech earnings as signs of cooling in some AI hyperscalers’ core businesses, elevated earnings expectations, cash flow and spending concerns, and disappointing guidance fueled a global technology rout. However, Al weakness drove a rotation and improved breadth that padded major averages, powering a 5.0% gain in the equal-weight S&P 500.
Core bonds pared back some of September’s losses as the Bloomberg U.S. Aggregate Index rose 2.4% in October. Long-end yields started the month at 24-year highs on sticky inflation, AI financing needs, and global fiscal worries. But despite rising oil prices, strong Treasury auctions, and some easing in fiscal concerns, stabilized Treasuries before a haven bid amid the global Al unwind pushed yields lower. While Treasuries posted their best month since December 2023, corporate bonds added 2.2% and mortgage-backed securities outperformed with a 3.1% advance.
Looking forward, LPL Research expects that steady economic growth and Al-driven earnings will remain key pillars of support for stocks through year-end despite a tricky macro, political, and geopolitical backdrop. Seasonal forces post-midterms favor stocks here, which have historically fared well under divided government in Washington, D.С.
In fixed income, the Al buildout has become a bond market story as well, as the buildout is simultaneously keeping growth and inflation elevated and flooding the long end with corporate duration that competes directly with Treasuries. That makes any slowdown in Al investment a potentially powerful catalyst for lower Treasury yields. Until then, though, rates will likely stay elevated, and bond returns may remain primarily driven by income. We favor owning core bond sectors over lower-quality, riskier sectors.
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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.
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