Touchstone Asset Allocation Guidance

Markets are balancing two competing forces: a highly fluid geopolitical backdrop and an economy increasingly supported by AI-driven investment. We are emphasizing diversification, quality, and active management while remaining fully invested at strategic weights.

By Touchstone Asset Allocation Committee

Allocation Update

Executive Summary

The situation in the Strait of Hormuz remains highly fluid. As a result, any near-term outlook must be framed with humility, as today’s assumptions may not hold tomorrow. Rather than anchor to a single outcome, we believe the timing of a resolution is likely the key driver of market behavior. A quicker resolution would likely support a more pro-cyclical response, while a belated resolution is likely to weigh on growth and earnings, particularly outside the U.S.
The Q1 U.S. GDP report reinforces this tension. Growth held up at a 2% pace, supported by a surge in business investment, up 10.4%, largely driven by AI-related spending. However, outside of AI-driven investment, the backdrop appears softer. Consumer spending slowed despite stronger tax refunds, suggesting underlying demand is losing momentum, and the recent rise in energy prices has yet to fully filter through the data.
Taken together, the outlook remains mixed. AI-driven investment is providing meaningful support, but the broader economy appears more vulnerable if cost pressures persist. Our tactical positioning reflects this balance: remaining fully invested to participate in continued resilience, while maintaining a quality bias in fixed income and a domestic bias in equities to help manage downside risk if the Strait remains closed for an extended period.

Download Asset Allocation Guidance

Fixed Income

Weight: Neutral
We maintain a neutral stance as bonds continue to serve a critical strategic role as portfolio ballast and a source of stable income

Duration
Weight: Slight Overweight
We maintained a slight overweight duration stance. Within a diversified fixed income portfolio, this represents a move closer to the duration of the Bloomberg U.S. Aggregate Bond Index.

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.

U.S. Taxable Non-Investment Grade
Weight: Moderate Underweight
We remain underweight high-yield bonds. In April, Credit spreads fell back toward historic lows, which appears inconsistent with expectations for slowing economic growth and risks presented by sustained high energy prices.

Equities

Weight: Neutral
We maintain a neutral allocation, reflecting a balance between risk and opportunity. We shifted to a domestic bias after incorporating a longer time frame for the conflict in Iran as we see U.S. equities as less exposed.

U.S. Large Cap Blend
Weight: Neutral
Strong earnings and AI spending have supported stocks and assuaged fears of higher energy prices. We don’t believe we are out of the woods, but this earnings season has been one to celebrate.

Growth
Weight: Neutral
We removed our underweight to Growth in March after valuations improved. AI remains a key earnings driver, though, risks persist given potential delays in data center construction and AI’s potential to disrupt industries.

Value
Weight: Neutral
Value equities face a more challenging backdrop if growth slows further, and prior sector-specific support in Health Care and Financials have weakened. While elevated energy prices provide a partial offset and valuations remain attractive relative to Growth, we maintain a neutral stance as we await a clearer catalyst.

U.S. Mid Cap
Weight: Slight Overweight
We hold a slight overweight, supported by more attractive valuations and potential earnings growth. Within mid caps, we prefer high-quality companies with strong cash generation.

U.S. Small Cap
Weight: Neutral
We have a neutral weight. Small caps enjoyed a strong ceasefire rally, though first-quarter earnings are coming in more mixed with weakness seen in the consumer sectors.

International Developed
Weight: Neutral
Developed international equities are more exposed to the current energy shock, creating near term risks to growth and margins. However, these headwinds are balanced by more attractive valuations and supportive policy dynamics, including increased defense spending. We maintain a neutral allocation.

International Emerging
Weight: Slight Underweight
We maintained a slight underweight. With roughly 80% of the index concentrated in Asia, emerging markets are particularly exposed to energy disruptions and higher input costs. Even with a resolution, normalization may take time, supporting a more cautious near-term stance.

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.