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

Allocation Update

Executive Summary

Will the Fed continue to deliver? Risk markets appear to think so, but could they be disappointed? Persistent economic resilience may allow the Fed to proceed with a more gradual, possibly less market-friendly rate-cutting pace.
That same resilience, however, has supported equities. With the Fed delivering a “risk management” cut and shifting its concerns toward labor market weakness, we removed our slightly cautious tilt toward fixed income.
We also closed our small cap underweight, as they typically benefit from Fed rate cuts. Additional supports include a potential broadening rebound in industrial production, a bottoming in EPS revision trends, expected earnings acceleration in 2026, and improving small business sentiment.

Download Asset Allocation Guidance

Fixed Income

Weight: Neutral
We shifted down to a neutral stance as yields and tighter spreads modestly reduce expected returns. Strategically, fixed income remains important, offering ballast and stable income.

U.S. Taxable Investment Grade
Weight: Moderate Overweight
We are tactically overweight, drawn by higher yields and lower economic sensitivity, which offer appealing risk-adjusted return prospects relative to recent history.

Duration
Weight: Neutral
We remain neutral, as we believe interest rate risks have become more balanced. Slowing economic growth could pull yields lower, while sticky inflation and a pendulum swing towards fiscal dominance could push yields higher.

U.S. Taxable Non-Investment Grade
Weight: Moderate Underweight
We are underweight high-yield bonds, given tight credit spreads. However, loose financial conditions, higher index quality, and little sign of distress reduce the need for a highly defensive stance.

Equities

Weight: Neutral
We shifted up to a neutral stance following the Fed’s cut and signaling greater concern about labor weakness, providing some further insurance against recession risk.

U.S. Large Cap Blend
Weight: Neutral
We see some near-term risk of market correction this fall. However, without a recession, we believe a correction could create a buying opportunity.

Growth
Weight: Moderate Underweight
We remain underweight Growth due to elevated stock-specific risks among top constituents – including valuations that seemingly require continued earnings surprises and upward revisions to justify them.

Value
Weight: Neutral
We maintain our neutral weight to Value. Greater economic sensitivity and limited valuation support are balanced by sector-specific opportunities in oversold Healthcare and Financials, supported by deregulation and a steeper yield curve.

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: Neutral
We have moved to neutral, based on lower valuations and an improving 2026 outlook that gives us more confidence in analyst earnings forecasts of faster earnings growth. We may look to add to this position following third-quarter earnings, depending on how management teams frame their outlooks for consumer demand and tariff impacts.

International Developed
Weight: Neutral
We remain at our strategic weight, supported by reduced currency risk, attractive relative valuations, and lower U.S. return prospects. However, Europe’s fragile recovery, fragmented capital markets, and regulatory burdens temper our enthusiasm.

International Emerging
Weight: Neutral
Our strategic weight is based on similar factors as Developed markets: reduced dollar risk, attractive valuations, and more tepid U.S. return expectations. EM is hard to generalize as prospects differ by country and company.

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.