Resilient Rally: AI, Earnings, and Trade Deals Drive July Highs
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:
- No changes
Investment Takeaways
Major averages ended a relatively quiet July in positive territory, after the S&P 500 did not post a 1% move in either direction for the first month since July 2023. Both the S&P 500 and Nasdaq posted fresh records throughout the month with markets overcoming headwinds such as dampened rate cut odds, sticky inflation data, and lingering jitters around tariff-related impacts. Nonetheless, Wall Street bulls focused on economic resiliency and easing trade tensions as Washington inked deals with the European Union and Japan, also offering deadline extensions to China and Mexico. Equities were further supported by a strong start to earnings season as blended earnings growth cruised past estimates alongside upbeat artificial intelligence (AI) takeaways. Among highlights, Alphabet (GOOG/L), Microsoft (MSFT), and Meta (META) topped earnings estimates and boosted AI spending plans.
Treasury yields ended July higher across the curve with the two year yield re-approaching 4% and the 10-year yield climbing back above 4.35%. Core bonds, measured by the Bloomberg U.S. Aggregate Bond Index, declined 0.26%. Monthly returns were muted; however, longer-term yields received a mid-month jolt as Washington pressured Federal Reserve (Fed) Chair Powell to lower rates, stoking concerns of unwarranted rate cuts. Concerns were short-lived, although strong economic data and dampened rate cut bets kept upward pressure on yields before weak July payrolls data sent yields lower and rate cut bets higher to start August. Domestic corporate credit ended little changed in July.
Looking forward, investors may be well served by bracing for occasional bouts of volatility until trade uncertainties are resolved. LPL Research advises against increasing portfolio risk beyond benchmark targets at this time, as the market seems to be factoring in a lot of positive news. The fixed income market remains volatile, although downside pressure on yields could emerge as the Fed prepares to resume its rate cutting cycle.
Given the latest rally and as the seasonally weak period of August and September arrives, a pullback would not be a surprise. As the economy slows and more tariffs are implemented, bouts of volatility are likely. But given the powerful AI trend, big tech’s significant earnings power, potential forthcoming Fed rate cuts, and the fiscal stimulus boost when 2026 begins, we believe pullbacks are likely to be shallow and bought.
The STAAC’s recommended tactical asset allocation includes:
- A neutral stance toward U.S. equities as elevated valuations amid pending pressure from a tariff rate in the mid-teens and a cooling economy (that likely skirts recession) offset the opportunity for a meaningful upside, in our view.
- The Committee favors growth over value for exposure to the AI theme and compelling earnings growth, at a premium, as the economy slows.
- The Committee favors large caps over small caps for their balance sheet quality and better position to manage tariffs.
- The Committee recommends well diversified regional exposures, with benchmark-level allocations to the U.S., developed international, and emerging markets. Non-U.S. equities offer upside from a potentially weaker U.S. dollar.
- Within fixed income, the STAAC holds a neutral weight in core bonds, with a slight preference for mortgage-backed securities (MBS) over investment-grade corporates. The Committee believes the risk-reward for core bond sectors (U.S. Treasury, agency MBS, investment-grade corporates) is more attractive than plus 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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