Market Commentary

• Market sentiment is favorable for risk assets, but things can always change.
• Consider rebalancing portfolios to take advantage of all-time highs in many markets.

As we get ready to enter August, risk assets continue to hit new milestones, underscoring a resilient economy. The S&P 500, Nasdaq Composite, and bitcoin recently hit new all-time highs. It’s hard to find a risk asset that has not done well this year with major indexes up significantly year-to-date, highlighting a favorable backdrop for investors.

Several factors are contributing to this positive momentum. Corporate earnings have exceeded expectations at the highest rate in recent years, particularly in technology and health care. Recent trade developments, including deals with the European Union and Japan, have helped alleviate some global trade uncertainties, supporting market sentiment. Additionally, the Federal Reserve is likely to lower interest rates this fall, which would be conducive to growth, encouraging business expansion and consumer spending. A resilient labor market, characterized by low unemployment and steady wage growth, further reinforces the positive market sentiment. Overall, these elements paint an encouraging picture for risk assets where innovation in areas like artificial intelligence continues to drive value creation.

That said, while the current landscape appears favorable, it is important to recognize that investing involves periods of changing market sentiment and fluctuations in the economic landscape. Markets do not rise indefinitely without interruptions; periodic pullbacks — such as corrections of 10% or more — are a normal part of the cycle and occur somewhat regularly. For instance, past volatility spikes, like those in 2022 or even earlier this year, tested portfolios but ultimately rewarded those who maintained a long-term perspective. Today, as risk markets are hitting new highs, a balanced view is essential. A well-balanced portfolio suited to your particular situation is critical, and market highs are an ideal time to make any necessary adjustments.

In that spirit, diversification involves spreading investments across various asset classes — such as equities for growth potential, bonds for fixed income and stability, real assets for inflation protection, and international or alternative investments for broader global exposure. This approach helps mitigate risks, ensuring underperformance in one area is more likely to be offset by strength in another. Once you have built your investment portfolio appropriately for your situation it’s equally vital that you review your allocations regularly and rebalance.

Rebalancing, typically conducted on a regular schedule, involves reviewing your asset allocation and adjusting it back to your target mix. For example, with the strong equity and risk-asset performance in recent months, you may find that equities have grown as a percentage of your overall portfolio above your intended allocation. Rebalancing captures gains from outperforming assets and reinvests those in underperforming asset classes, enhancing long-term returns while aligning with your risk tolerance and goals.

The positive market sentiment may continue, but there are many potential bumps in the road, and as we have seen this year, markets can reprice risks rather abruptly when significant factors change unexpectedly.

Asset allocation and diversification do not guarantee investment returns or eliminate risk of loss in declining markets. Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets, especially foreign markets, are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Foreign investing has additional risks including those associated with currency fluctuation, political and economic instability, and different accounting standards. These risks are heightened in emerging markets. Bonds are subject to market, interest rate, price, credit/default, liquidity, inflation and other risks. Prices tend to be inversely affected by changes in interest rates. Real assets are subject to the risks associated with real estate, commodities and other investments and may not be appropriate for all investors.

Alternative investments, such as hedge funds, private equity/private debt and private real estate funds, are speculative and involve a high degree of risk that is suitable only for those investors who have the financial sophistication and expertise to evaluate the merits and risks of an investment in a fund and for which the fund does not represent a complete investment program. They entail significant risks that can include losses due to leveraging or other speculative investment practices, lack of liquidity, volatility of returns, restrictions on transferring interests in a fund, potential lack of diversification, absence and/or delay of information regarding valuations and pricing, complex tax structures and delays in tax reporting, less regulation and higher fees than mutual funds. Hedge fund, private equity, private debt and private real estate fund investing involves other material risks including capital loss and the loss of the entire amount invested. A fund's offering documents should be carefully reviewed prior to investing.

Global Investment Strategy (GIS) is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.

The information in this report was prepared by Global Investment Strategy. Opinions represent GIS’ opinion as of the date of this report and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.

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