Touchstone Asset Allocation Guidance

Looking into 2026, we see a moderately supportive policy backdrop, AI-driven productivity gains, and improving global growth, which should aid risk assets. However, valuation, concentration, and macro risks argue for a measured—not overtly risk-on—stance, with international equities likely delivering competitive though more moderate returns.

By Touchstone Asset Allocation Committee

Allocation Update

Executive Summary

Looking toward 2026, we see a broadly constructive backdrop for risk assets. The Fed is expected to continue normalizing rates, while front-loaded tax incentives from the OBBBA should provide additional near-term support. Spending on AI and further penetration into businesses is expected to drive productivity gains.
Our allocation guidance remains fully invested to strategic allocation weights. However, despite our constructive outlook for 2026, we are not risk-on and overweight to equities. Valuation concerns, index concentration, several potential macro risks, including signs of slowing real wage growth, policy uncertainty, and persistent inflation, warrant a measured stance.
While we don’t expect a repeat of 2025’s strong international equity performance, we believe returns can be competitive with U.S. stocks. Europe’s economy appears to be emerging from its malaise, with earnings set to rebound, and many emerging market companies provide an alternative way to participate in the AI capacity build-out.

Download Asset Allocation Guidance

Fixed Income

Weight: Neutral
We maintain a neutral stance as lower yields and tighter spreads modestly reduce expected returns, but bonds continue to play a critical strategic role as portfolio ballast and a source of 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 more defensive stance.

Equities

Weight: Neutral
We maintain a neutral weight as we see a balance between equity risk and opportunity. The Fed’s resumption of rate cuts reflects greater concern about labor weakness, though policy uncertainty remains with the government shutdown.

U.S. Large Cap Blend
Weight: Neutral
Near-term correction risk has eased as strong third-quarter earnings (so far) have provided support.

Growth
Weight: Moderate Underweight
We are 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 in 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 a neutral weight, based on lower valuations and an improving 2026 outlook support faster expected earnings growth. We may consider adding exposure following third-quarter earnings, depending on management commentary around 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 prospective U.S. returns. However, Europe’s 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 benefiting from Fed rate cuts and having greater technology exposure with key companies in the AI supply chain.

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.