Raising S&P 500 Target and Yield Forecast and Moving Up in Market Cap and Quality
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:
- Upgrade Large Value Overweight, Emphasis on Quality
- Downgrade Small Growth to Underweight
- Upgrade Consumer Discretionary to Underweight, Technology to Overweight.
- Downgrade Real Estate to Underweight, Industrials to Neutral.
- Increase S&P 500 Year-End Fair Value Target Range to 7,950 – 8,050.
- Increase 10-Year U.S. Treasury Yield Year-End Forecast to 4.75% – 5.25%.
Investment Takeaways
Major averages ended the final month of the third quarter on a mixed note with the S&P 500 posting a slight loss. Gains in the technology and communication services were offset by declines across the nine remaining sectors as the seasonally weak month of September was marked by weak breadth. Several moving pieces were in play, but equity markets broadly took cues from the bond and energy markets. Risk sentiment was dampened as hot inflation inputs, ongoing fiscal jitters, and the first Federal Reserve (Fed) rate hike since 2023 spurred a big rally in Treasury yields, while intermittent ramps in hostilities and little diplomatic progress in the Mideast pushed oil prices up over 7%. However, the artificial intelligence (AI) theme provided some index-level resilience on new model and agentic AI enthusiasm.
Core bonds fell sharply last month, measured by a 3.5% loss in the Bloomberg U.S. Aggregate Index. The long-end led a backup in yields across the Treasury curve, leaving 10- and 30-year yields at multi-decade highs. Rising oil prices and sticky inflation angst played a role in the rate backup, but weak auctions, resilient economic data, lackluster buybacks, robust corporate issuance, and a shift toward hawkish Fed takeaways were all factors in government bonds’ weakest month in two years. Corporate and mortgage-backed securities (MBS) underperformed.
Looking forward, LPL Research expects the AI-driven earnings strength will remain a key pillar of support for stocks through year-end despite a tricky macro and geopolitical backdrop. STAAC maintains its moderate equity overweight recommendation. A pickup in volatility related to policy uncertainty ahead of midterm elections is possible, but seasonal forces start to increasingly favor stocks in October.
In fixed income, sticky inflation and resilient economic growth will likely mean a reversal of (some of) the Fed maintenance rate cuts that took place in 2025 (but we’re not expecting a new rate hiking campaign), leaving Treasury yields range-bound, with the 10-year now expected to finish the year between 4.75% and 5.25%. In this environment, bond market returns may remain primarily driven by income, and we favor owning core bond sectors over lower quality riskier sectors.
The STAAC’s recommended tactical asset allocation includes:
- A modest overweight stance toward equities, with a preference for high-quality large cap U.S. equities backed by resilient economic growth, AI innovation, and relative insulation from possible additional energy shocks.
- Slight preference for the value style over its growth counterpart. Strong earnings and an improved outlook for the growth-heavy technology sector are offset by cyclical tailwinds, relatively more attractive valuations, and energy strength on the value side.
- Favor technology. Strong earnings growth, significant technical momentum, and the reset of extreme positioning back to normal underpin our October sector upgrade.
- Energy. Oil prices may remain higher for longer given ongoing disruptions to tanker traffic in the Middle East. The sector offers a desirable hedge against potential additional energy disruptions and delays in restoring global production.
- Within fixed income, the Committee continues to believe the risk/reward favors owning core bond sectors over the riskier sectors.
- Within taxable markets, with yields still elevated, particularly for high-quality sectors within the fixed income universe (Treasuries, MBS, and shorter-maturity corporates), income opportunities remain attractive
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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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