Touchstone Asset Allocation Guidance

Markets remain resilient, but the risks are shifting. Healthy earnings and economic growth support our equity overweight, while inflation, fiscal pressures and growing competition for capital led us to move duration back to neutral. See where we continue to find opportunity and where we believe investors should remain selective.

By Touchstone Asset Allocation Committee

Allocation Update

Executive Summary

We moved duration back to neutral this month as the risks have become more balanced. Yields still provide attractive income, but above-target inflation and enormous capital requirements across government deficits and private-sector AI infrastructure are competing for a finite pool of assets, which could keep long-term yields elevated.
Stocks had a strong August despite continued geopolitical uncertainty. Both U.S. and international markets rebounded from a weak July, helped by another healthy earnings season. Importantly, earnings strength has extended beyond the largest U.S. technology companies. The market continues to mirror the resilience of the economy.
We remain moderately overweight equities, supported by healthy earnings and resilient economic growth. But inflation, geopolitical risks and uncertainty around the Fed argue against becoming more aggressive. Within fixed income, we prefer higher-quality credit and remain underweight high yield. We remain constructive but believe this is a time for measured risk-taking.

Download Asset Allocation Guidance

Fixed Income

Weight: Moderate Underweight
We maintain moderate tactical underweight as we continue to see more attractive return opportunities in equities. Bond yields remain appealing, but inflation risks, fiscal concerns, and a less communicative Fed add uncertainty to the outlook.

Duration
Weight: Neutral
We shifted duration back to neutral as the risks have become more balanced. Heavy borrowing needs from the federal government and AI-related infrastructure investment are increasing competition for capital and could put upward pressure on long-term yields.

U.S. Taxable Investment Grade
Weight: Neutral
We remain neutral. Yields are attractive, but significant data center-related issuance, particularly on the long end of the curve, creates additional competition for capital and argues for selectivity.

U.S. Taxable Non-Investment Grade
Weight: Moderate Underweight
We remain underweight high yield bonds. Credit spreads provide little cushion should inflation remain elevated or economic growth begins to slow.

Equities

Weight: Moderate Overweight
We maintain a moderate overweight, supported by resilient economic data and continued earnings strength. While AI remains the dominant market driver, there are some encouraging signs that earnings growth is broadening beyond AI-related companies.

U.S. Large Cap Blend
Weight: Moderate Overweight
We maintain a moderate overweight. Strong earnings growth and continued AI-related investment have supported equity markets. Constraints on data center buildout such as permitting and power needs could create some earnings risk, though AI demand remains very strong.

Growth
Weight: Neutral
We remain neutral on Growth. Strong earnings growth and continued AI-related investment remain supportive, though this earnings strength creates a high hurdle for earnings growth in 2027.

Value
Weight: Neutral
We remain 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.

U.S. Mid Cap
Weight: Slight Overweight
We maintain a slight overweight. Earnings breadth has improved, although mid caps have recently lagged large caps due to a slower rate of growth. We continue to favor high-quality companies with strong balance sheets and consistent cash generation.

U.S. Small Cap
Weight: Neutral
We remain neutral but continue to see reasons for increased optimism. Earnings and sales revision breadth have improved, although relative performance has yet to provide decisive confirmation.

International Developed
Weight: Neutral
We remain neutral, though the outlook has improved modestly. Earnings have been materially better and European economic growth is modestly exceeding expectations, despite higher energy prices.

International Emerging
Weight: Slight Underweight
We remain slightly underweight. EM returns have become increasingly dependent on three large, historically cyclical semiconductor companies. This concentration makes the asset class more dependent on company-specific fundamentals and less on the broader macro factors that typically guide our allocation decisions.

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.