Policy Influences Will Be Key for Markets in 2026
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
Stocks ended a third straight year of double-digit gains on a tepid note with the S&P 500 snapping a seven-month winning streak
with a fractional loss in December. Choppy trading seen throughout the fourth quarter persisted in the final month of the
year as equity investors grappled with a less hawkish than expected Federal Reserve (Fed) rate cut and intensified artificial
intelligence (AI) scrutiny. Market chatter also highlighted a cyclical rotation gaining traction, which led big tech names mostly lower
and contributed to some index level pressure, but was broadly viewed as a positive forward signal. Earnings headlines were light
last month, although a few high-profile names drew attention, highlighted by disappointing free cash flow and high spending
guidance from Oracle (ORCL) and a beat and raise from Broadcom (AVGO) failing to excite investors’ lofty expectations.
Core bonds also capped an above-average 7.3% annual advance on a relatively subdued note, ending December with a 0.25% gain as measured by the Bloomberg U.S. Aggregate Index. While the Fed fulfilled hopes of another 0.25% rate reduction on December 10, downward pressure on yields was offset by a rise in global bond yields as markets from Australia to Europe priced in fewer local rate cuts in 2026. Sovereign yields in Germany and France reached their highest levels in a decade, while Japanese government bond yields hit levels unseen since 1999. Looking forward, investors may be well served by bracing for additional bouts of volatility amid a slowing economy and likely increasing AI investment scrutiny. While our analysis shows0 positioning remains relatively neutral, valuations remain elevated.
Pullbacks may be shallow given technology-powered earnings strength, likely additional Fed rate cuts, and the fiscal stimulus boost this year. LPL Research expects mid-to-high single digit returns for equities in 2026, as policy tailwinds offset headwinds and AI investment continues to surge, as discussed in Outlook 2026: The Policy Engine.
The fixed income market remains rangebound, although downside pressure on yields could emerge as the Fed continues its rate
cutting cycle.
- The STAAC’s recommended tactical asset allocation includes: A neutral stance toward U.S. equities. A lot of good news is
priced in, potentially limiting the opportunity for near-term upside - The Committee favors growth over value for exposure to the AI theme and compelling earnings growth as the economy slows.
- The Committee favors large caps over small caps, partly due to superior balance sheet quality, ongoing AI investment, and
potentially tighter credit markets in 2026. - 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. EM looks better on
a technical analysis basis. - 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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