Patiently Awaiting a Pullback Before Considering Adding Risk
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:
- Upgraded materials to neutral.
- Upgraded utilities to neutral.
- Downgraded financials to neutral.
- Downgraded real estate to underweight.
Investment Takeaways
U.S. equities built on year-to-date gains in October with the S&P 500 extending its monthly winning streak to six. Wall Street bulls focused on a meaningful de-escalation in U.S.-China trade tensions after Presidents Trump and Xi inked a one-year trade truce, highlighted by a 10% tariff reduction. Monthly gains were concentrated in mega cap names, fueled by a deluge of fresh artificial intelligence (AI) partnerships. Big tech highlighted the earnings calendar and the AI secular growth theme remained intact despite mixed results. Standouts included Alphabet (GOOG/L) and Amazon (AMZN) offering upbeat takeaways, while Meta (META) shares faced downside pressure from AI spending scrutiny. Meanwhile, the Federal Reserve (Fed) delivered another 0.25% rate cut, as expected, although Fed Chair Powell struck a hawkish tone — weighing on stocks to end the month.
Core bonds continued to gain ground in October, measured by a 0.6% gain in the Bloomberg U.S. Aggregate Index. U.S Treasuries printed a third straight monthly advance as yields moved near year-to-date lows, garnering some support from heightened Treasury demand after regional bank loan-impairment disclosures briefly sparked credit jitters. Nonetheless, Treasuries pared gains after Fed Chair Powell downplayed the odds of a December rate cut and announced the end of quantitative tightening. High-yield markets crept higher, while municipal bonds outperformed, posting a positive October return for the first time in six years.
Looking forward, investors may be well served by bracing for occasional bouts of volatility amid a slowing economy, AI investment scrutiny, and continued policy uncertainty. Considering elevated valuations and the impressive rally off April lows, a pullback would not be a surprise. 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.
LPL Research advises against increasing portfolio risk beyond benchmark targets currently with stock valuations reflecting a lot of positive news.
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 as elevated valuations, increasing tariff costs, and a cooling economy (that likely skirts recession) offset the opportunity for meaningful upside, in our view, despite strong earnings-driven gains for technology stocks.
- 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 and relatively 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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