Touchstone Asset Allocation Guidance

We made a number of asset allocation changes in March in response to rising geopolitical tensions. We extended duration and tilted toward U.S. equities by adding to large cap Growth and reducing emerging market exposure.

By Touchstone Asset Allocation Committee

Allocation Update

Executive Summary

The conflict in Iran has taken over the headlines and attention of the markets. Both stocks and bonds, across domestic and international markets, have declined amid concerns about slower growth, margin pressure, and higher inflation. These risks are real, though likely more pronounced outside the U.S. What remains uncertain is the duration of the conflict. We have extended our base case from weeks to months, prompting several asset allocation adjustments.
As yields moved higher in response to inflation concerns tied to rising energy prices, we saw an opportunity to incrementally extend duration. At these higher levels, compensation for interest rate risk has improved, particularly in high-quality bonds. This creates a more attractive entry point, especially if growth slows or geopolitical risks begin to stabilize.
We reduced exposure to emerging markets and reallocated toward U.S. large cap growth, where earnings visibility is stronger and sensitivity to higher energy prices is more limited. Emerging markets, particularly in Asia, face greater near-term risks due to their reliance on imported energy and exposure to supply disruptions. In contrast, large cap growth offers more resilient earnings trends and improved valuations following recent underperformance.

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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 shifted to 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. While credit spreads have widened since the onset of the conflict, they have not reached levels compelling enough to increase exposure.

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
Coming into 2026, we expected the market might pause or pull back to allow earnings to catch up, but we did not anticipate a geopolitical shock. Earnings estimates have held up, though they may be at risk given potentially higher input costs and lower demand.

Growth
Weight: Neutral
We removed our underweight to Growth as stocks have fallen while earnings revisions moved higher. AI remains a key earnings driver, though, risks persist given the rapid pace of innovation and its 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. Fourth quarter earnings were strong, with topline upside the driver; however, softer labor conditions and uneven demand suggest patience is warranted.

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 shifted to a slight underweight from an overweight. 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.