Touchstone Asset Allocation Guidance

Markets are broadening beyond the mega caps as improving economic data, falling oil prices, and easing geopolitical concerns support a more constructive backdrop for risk assets. With employment remaining resilient and market leadership expanding across sectors, investors may find new opportunities as the rally becomes more broad-based.

By Touchstone Asset Allocation Committee

Allocation Update

Executive Summary

Early in June, we increased our equity allocation to a moderate overweight following a market pullback. Economic data continue to surprise to the upside, prospects for a reopening of the Strait of Hormuz have improved, and while AI remains the most important market driver, its influence continues to broaden across sectors and industries.
Importantly, this adjustment was not driven by a negative view of fixed income. We continue to find bond yields attractive and believe high-quality fixed income remains an important source of income, diversification, and portfolio stability.
The primary risk facing markets has also evolved. Earlier concerns centered on slowing growth and geopolitical disruptions. Today, inflation appears to
be the more important challenge. AI infrastructure spending, energy constraints, and supply chain bottlenecks are creating pricing pressures that could keep interest rates higher for longer than investors currently expect.

Download Asset Allocation Guidance

Fixed Income

Weight: Moderate Underweight
We lowered our tactical stance to a moderate underweight as we see more attractive return opportunities in equities and potential inflation related risks.

Duration
Weight: Slight Overweight
We maintained a slight overweight duration stance. While inflation risks have increased, current yields provide a more meaningful income cushion than in recent years, and we do not believe inflation pressures will be sufficient to trigger a sustained rise in long-term yields.

U.S. Taxable Investment Grade
Weight: Neutral
We moved to a neutral position funding our equity overweight. We continue to be drawn to the higher yields and lower economic sensitivity found within corporate and securitized credit.

U.S. Taxable Non-Investment Grade
Weight: Moderate Underweight
We remain underweight high-yield bonds. Credit spreads remain near historic lows, while yield sits only modestly above the historical median. This suggests little cushion should inflation rates rise or economic growth falter.

Equities

Weight: Moderate Overweight
We increased equities to a moderate overweight, supported by improving economic data, progress toward reopening the Strait, and continued strength in earnings. AI remains the dominant market driver.

U.S. Large Cap Blend
Weight: Moderate Overweight
Strong earnings growth and continued AI-related investment have supported equity markets, and now we are seeing progress in the reopening of the Strait. 1Q earnings were very strong, and forward estimates continue to move higher.

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
The Value index contains a diverse mix of defensive, cyclical, and even growth-oriented companies that have migrated from Growth benchmarks. While we see attractive opportunities within the universe, we believe they are best captured through active management rather than passive.

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 remain neutral but see growing reasons to consider an upgrade. Earnings revisions have improved, participation has broadened across industries benefiting from AI-related spending, and lower fuel prices could help alleviate pressure on consumer-oriented businesses.

International Developed
Weight: Neutral
Developed international equities stand to benefit from lower energy prices, although higher interest rates and inflation pressures are headwinds. While valuations are relatively attractive, we believe some discount is warranted given ongoing structural growth challenges, particularly in Europe. We maintain a neutral allocation.

International Emerging
Weight: Slight Underweight
We remain slightly underweight. With roughly 80% of the index concentrated in Asia, emerging markets remain sensitive to energy costs and external demand. Although a resolution in energy markets would be supportive, normalization may take time, warranting 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.