Touchstone Asset Allocation Guidance

We believe we can add value by adjusting portfolio weights in response to changing market conditions and in anticipation of changing fundamentals. History demonstrates that risk assets move through repeated boom and bust cycles. While the economic cycle influences these cycles, they do not necessarily overlap with the risk asset cycle.

By Touchstone Asset Allocation Committee

Economy & Markets

Executive Summary

Fasten your seat belts. We anticipate increased market volatility as we enter the fall, with both upside and downside risk potential growing. We are maintaining a slightly defensive posture, though we would likely take advantage of any major selloffs.
Signs of speculative fervor are building, as retail investors pile into meme stocks and measures of investor sentiment have surged to levels historically associated with market tops. Historically, September has been the worst month for the S&P 500 on average. A correction is possible.
On the other hand, fundamentals remain solid with 2Q earnings, building tariff certainty, and Fed rate cuts likely on the horizon. While valuations are high, they are not unprecedented, and with the ongoing AI spending narrative, we could see animal spirits take prices even higher.

Download Asset Allocation Guidance

Fixed Income

Weight: Slight Overweight
We maintain a slight overweight. With bond yields near 10-year highs, fixed income offers attractive income and competitive return potential relative to equities.

U.S. Taxable Investment Grade
Weight: Moderate Overweight
Drawn by higher yields and lower economic sensitivity, we are tactically overweight investment-grade bonds, which offer appealing risk-adjusted return prospects.

Duration
Weight: Neutral
We remain neutral on duration, as we believe interest rate risks have become more balanced. Slowing economic growth could pull yields lower,
while sticky inflation and potential disruptions from rising public debt and budget negotiations could push yields higher.

U.S. Taxable Non-Investment Grade
Weight: Moderate Underweight
We are underweight high-yield bonds given tight credit spreads, despite expected slowing in economic growth. However, loose credit conditions, higher index quality, and a manageable maturity wall limit the need to become too defensive.

Equities

Weight: Slight Underweight
We are slightly underweight equities overall, due to reduced exposure to both U.S. large-cap Growth and small-cap, partly offset by a moderate overweight to mid-caps.

U.S. Large Cap Blend
Weight: Neutral
We continue to see elevated second-half earnings risk for the S&P 500 from tariffs, DOGE, and immigration policies. Prices have moved ahead of fundamentals, and the market may need a pause or correction to allow fundamentals to catch up.

Growth
Weight: Moderate Underweight
We remain underweight Growth due to elevated stock-specific risks among top constituents – including antitrust concerns, significant international exposure, and stretched valuations.

Value
Weight: Neutral
We maintain our neutral weight to Value. Greater economic sensitivity and limited valuation support is balanced by sector-specific opportunities in oversold Healthcare and in Financials with deregulation likely.

U.S. Mid Cap
Weight: Moderate Overweight
We maintain a mid-cap overweight, favoring the segment for its attractive valuations, lower international exposure, and less economic risk compared to small-caps. Within mid-caps, we prefer high-quality companies with strong cash generation.

U.S. Small Cap
Weight: Slight Underweight
We are slightly underweight small-caps, reflecting greater earnings risk. Small business owner sentiment remains weak, particularly around capital spending and hiring.

International Developed
Weight: Neutral
We moved to a strategic weight after re-evaluating the prospects for the U.S. dollar, attractive relative valuations, and weakening economic conditions in the U.S. However, Europe’s fragile recovery, fragmented capital markets and regulatory burdens temper our enthusiasm.

International Emerging
Weight: Neutral
Also now at a strategic weight based on similar factors as Developed markets: reduced dollar risk, attractive valuations, and weaker U.S. fundamentals. The next key inflection points will be outcomes of ongoing U.S. trade negotiations.

*Reflects percentage point difference
Source: Touchstone Investments; assessments are made using data and information through July 2025. For illustrative purposes only. Diversification does not guarantee investment returns and does not eliminate the risk of loss. Diversification among investment options and asset classes may help to reduce overall volatility.

Strategic: Strategic asset allocation is a baseline allocation between asset classes established with a longer term focus and congruent with an investor’s investment goals and objectives. The allocation is meant to optimize the asset mix through methodical diversification in an attempt to maximize return and lessen risk.

Tactical: Tactical asset allocation is differentiated from strategic asset allocation by having a much shorter time horizon and the goal of adding alpha beyond what would be allowed through static strategic weights. Markets tend to be more volatile over shorter time horizons, while longer time frames tend to smooth out that volatility. That enhanced volatility in the short term creates the opportunity for either return enhancement and/or risk reduction by adding to or reducing weights of different asset classes.

About the Author

Touchstone Asset Allocation Committee

The Touchstone Asset Allocation Committee (TAAC) consisting of Richard “Crit” Thomas, CFA, CAIA – Global Market Strategist, Erik M. Aarts, CIMA - Vice President and Senior Fixed Income Strategist, and Tim Paulin, CFA – Senior Vice President, Investment Research and Product Management, develops in-depth asset allocation guidance using established and evolving methodologies, inputs and analysis and communicates its methods, findings and guidance to stakeholders. TAAC uses different approaches in its development of Strategic Allocation and Tactical Allocation that are designed to add value for financial professionals and their clients. TAAC meets regularly to assess market conditions and conducts deep dive analyses on specific asset classes which is delivered via the Asset Allocation Summary document. Please contact your Touchstone representative or call 800-638-8194 for more information.