S&P 500 Starts the Second Half at an All-TimeHigh
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:
- Raised year-end 2025 fair value target range forthe S&P 500 to 6,000 6,100
- Raised the U.S. 10 year yield year-end target range to 4.00 4.50%
- Upgraded view to positive on alternatives specialty strategies and long/short equity
Investment Takeaways
U.S. stocks ended June at record highs, capping solid quarterly and first half gains with the S&P 500 posting back-to-back monthly rallies, while the Nasdaq Composite secured its third straight monthly advance. Headline volatility continued to drive markets, with the biggest stories including trade negotiations, President Trump’s signature reconciliation bill, and geopolitical tensions. The White House requested trading partners provide their “best and final” trade deals, although no new deals were inked in June. Also, on Capitol Hill, the One Big Beautiful Bill Act (OBBBA) made its way through Congress as airstrikes between Israel and Iran fueled geopolitical tensions, ending with the U.S. stepping in to bomb Iranian nuclear sights and brokering a ceasefire. The corporate earnings outlook remained healthy, with an above average number of S&P 500 companies offering positive earnings per share (EPS) guidance.
Treasury yields ended lower across the curve last month with the two-year yield falling back below 3.75% and the 10-year yield dropping below 4.25%. Core bonds, measured by the Bloomberg U.S. Aggregate Bond Index, rose 1.5%, reversing May’s decline. Treasury yields faced downward pressure from increasing Federal Reserve (Fed) rate cut bets, with markets pricing in roughly 0.65% of policy easing by year end compared to 0.5% expected at the end of May. Simultaneously, bond markets analyzed the reconciliation bill for potential impacts on debt and deficit spending. Domestic corporate credit ended June in positive territory.
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, with longer-term yields hovering just below levels that created discomfort in risk appetite for stocks back in May.
While the U.S. economy is holding up well, LPL Research believes the S&P 500 is fairly valued and that any further gains would necessitate an earnings surprise and carefully balanced lower Treasury yields (too low could signal rising recession risks). As trade deals come through, the trajectory of the average effective tariff rate, as well as OBBBA deficit spending will be crucial.
The STAAC’s recommended tactical asset allocation includes:
- A neutral stance toward U.S. equities as elevated valuations amid limited corporate visibility and a cooling economy (that likely skirts recession) offset the opportunity for a meaningful upside, in our view, even with lowered tariffs.
- 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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