Executive Summary
- We made no tactical changes during the month of May. We expect continued near-term volatility due to the unpredictable shifts in U.S. policy making.
- While we believe that recession risks have eased, economic growth is likely to slow in the second half, warranting near-term caution for assets not priced for a slowdown.
- While dollar weakness benefits U.S. investors in foreign securities, foreign currency strength can weigh on foreign corporate profits. We have growing concerns about export-driven economies, given expected economic slowdowns in the two largest economies, the U.S. and China.
Fixed Income
Weight: Slight Overweight
We maintain a slight overweight due to near-term economic risks. With bond yields near 10-year highs, fixed income offers attractive income and competitive return potential versus equities.
U.S. Taxable Investment Grade
Weight: Moderate Overweight
We are tactically overweight investment-grade bond exposure, drawn by higher yields and lower economic sensitivity, 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: Slight Underweight
We maintain a slight underweight high-yield bonds due to economic risks and tight spreads. However, loose credit conditions, higher index quality, and a manageable maturity wall limit the need to become more defensive.
Equities
Weight: Slight Underweight
We are slightly underweight equities overall, due to reduced exposure to both EM and developed international stocks. Within U.S. equities, we continue to favor mid caps.
U.S. Large Cap Blend
Weight: Neutral
We see elevated second-half earnings risk for the S&P 500 from tariffs, DOGE, immigration policies, and monetary policy that remains restrictive. As a result, we have lowered our return expectations, increasing the attractiveness of other asset categories.
Growth
Weight: Moderate Underweight
We remain underweight Growth due to elevated stock specific risks among top constituents, including antitrust concerns, significant international exposure, and high valuations.
Value
Weight: Neutral
We kept our neutral weight to Value given greater economic sensitivity within the index and little valuation support.
U.S. Mid Cap
Weight: 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 has weakened, particularly around capital spending and hiring.
International Developed
Weight: Slight Underweight
We removed our slight overweight in early April. Tariff risks, currency strength, and weakening economic conditions in the U.S. and China create earnings risk for international companies.
International Emerging
Weight: Slight Underweight
We remain slightly underweight given the potential drag from delayed Fed rate cuts and broader tariff threats on China and beyond.
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.