Asset Allocation Chart of the Month
Earnings Growth Remains Strong and is Broadening
- AI is simultaneously supporting economic growth and corporate earnings while becoming a key driver of market returns. Its influence now extends well beyond Technology into Industrials, Utilities, Real Estate, and other businesses benefiting from the infrastructure buildout. As a result, companies in seemingly different sectors and industries may increasingly depend on the same underlying driver: continued AI investment.
- We remain constructive on the S&P 500. Earnings are strong, estimates are being revised higher, and AI investment remains robust. But those same forces have left the index increasingly dependent on the AI cycle. Bloomberg estimates that companies with significant AI exposure represent roughly 36% of the S&P 500 but contribute 58% of its overall risk. By comparison, AI related companies account for less than 8% of developed ex-U.S. equities and about 14% of risk.
- That creates a form of concentration that traditional sector labels can miss. The important question isn’t how many stocks or sectors you own, but what your portfolio ultimately depends on. If a slowdown in AI investment would affect an increasingly large share of the portfolio at the same time, diversification may be less robust than it appears. The issue is simply that the consequences of being wrong about AI are growing as more of the portfolio becomes connected to it.
- Some investors may question the need for diversification after years of U.S. large cap outperformance. But diversification isn't designed to outperform the market's best-performing asset. If we knew the winner in advance, there would be little reason to diversify. Its purpose is to reduce dependence on any single outcome, particularly after years of strong performance have increased that exposure.
- Investors don't have to abandon what has worked to improve diversification. International equities offer exposure to AI beneficiaries while relying less heavily on the AI theme, while small and mid cap equities provide access to a broader set of earnings drivers that are less represented in the S&P 500. The objective is not necessarily to own less U.S. large cap, but to complement it with what is different.
The Touchstone Asset Allocation Committee
The Touchstone Asset Allocation Committee (TAAC) consisting of 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 are delivered via the Asset Allocation Summary document. Please contact your Touchstone representative or call 800.638.8194 for more information.
A Word About Risk
Fixed-income securities can experience reduced liquidity during certain market events, lose their value as interest rates rise and are subject to credit risk which is the risk of deterioration in the financial condition of an issuer and/ or general economic conditions that can cause the issuer to not make timely payments of principal and interest also causing the securities to decline in value and an investor can lose principal. When interest rates rise, the price of debt securities generally falls. Longer term securities are generally more volatile. Investment grade debt securities may be downgraded by a Nationally Recognized Statistical Rating Organization to below investment grade status. Non-investment grade debt securities are considered speculative with respect to the issuers' ability to make timely payments of interest and principal, may lack liquidity and has had more frequent and larger price changes than other debt securities. Equities are subject to market volatility and loss. Growth stocks may be more volatile than investing in other stocks and may underperform when value investing is in favor. Value stocks may not appreciate in value as anticipated or may experience a decline in value. Stocks of large-cap companies may be unable to respond quickly to new competitive challenges. Stocks of small- and mid-cap companies may be subject to more erratic market movements than stocks of larger, more established companies. Investments in foreign, and emerging market securities carry the associated risks of economic and political instability, market liquidity, currency volatility and accounting standards that differ from those of U.S. markets and may offer less protection to investors. The risks associated with investing in foreign markets are magnified in emerging markets, due to their smaller and less developed economies.
The information provided reflects the research and opinion of Touchstone Investments as of the date indicated, and is subject to change without prior notice. Past performance is not indicative of future results. There is no assurance any of the trends mentioned will continue or forecasts will occur. Investing in certain sectors may involve additional risks and may not be appropriate for all investors. The indexes mentioned are unmanaged statistical composites of stock or bond market performance. Investing in an index is not possible. For Index Definitions see: TouchstoneInvestments.com/insights/investment-terms-and-index-definitions
Please consider the investment objectives, risks, charges and expenses of the fund carefully before investing. The prospectus and the summary prospectus contain this and other information about the Fund. To obtain a prospectus or a summary prospectus, contact your financial professional or download and/or request one on the resources section or call Touchstone at 800-638-8194. Please read the prospectus and/or summary prospectus carefully before investing.
Investment return and principal value of an investment in a Fund will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. All investing involves risk.
Touchstone Funds are distributed by Touchstone Securities, LLC*
*A registered broker-dealer and member FINRA/SIPC.
Touchstone is a member of Western & Southern Financial Group
Not FDIC Insured | No Bank Guarantee | May Lose Value
