Market Commentary

• With a good stock rally behind us and valuations full for a number of sectors, we thought it might be a good time to make a few portfolio adjustments and get ready for a potentially extended period of chop in markets.
• Trimming and rebalancing are two good words to describe the portfolio adjustments we are favoring.

With the S&P 500 Index (SPX) up a touch over 28% from the early-April low, the Tech sector up more than 52% since that time, and the Communication Services sector rallying almost 35% at the time of this writing, investors need to assess their market expectations versus reality. For us, the SPX sits right in the middle of our year-end target range at approximately 6,400. And the Bloomberg Commodity Total Return Index posted a 4.5% gain year-to-date through August 11. We have favored stocks and commodities over bonds and long-term investors taking advantage of pullbacks to add to these risk asset categories.

So with a good stock rally behind us and valuations in our view full for a number of sectors, we thought it might be a good time to make a few portfolio adjustments and try to get ready for what we believe will be a potentially extended period of chop in the equity and commodity markets. We think a number of uncertainties could easily cause market headwinds that might provide further investment opportunities later this year or in the early stages of 2026.

Our focus on quality, whether it be in stocks or bonds, has not changed. We also haven’t changed our view that inflation is likely to crawl higher over the balance of this year and slow economic growth. Recall that we are looking for just 1.3% gross domestic product (GDP) growth this year and a slightly better 1.5% rate next year, both well below rates seen in recent years. We also believe that the Federal Reserve is likely to cut interest rates this year and next.

Trimming and rebalancing are two good words to describe the portfolio adjustments we are favoring. Note that we continue to carry a favorable (overweight) recommendation to U.S. Large and Mid Cap Equities as they tend to have stronger balance sheets and dependable cash flows than their smaller-cap brethren. We have downgraded U.S. Small Cap Equities to unfavorable as the recent rally has taken the Russell 2000 Index to levels where the slowing economy and still-high borrowing costs put risk versus potential reward out of balance. In terms of equity sectors, we have downgraded Communication Services (as a way to trim tech exposure; we still favor the Information Technology sector) and Energy to neutral. At the sector level, we favor reallocating those funds to the most favorable rated Financials sector.

Consistent with our downgrade to the Energy equity sector, we also are downgrading Commodities and the commodity Energy sector to neutral. We also are upgrading the commodity Industrial Metals sector where tariffs have not been as large as feared.

At the asset-class level, we favor reallocating from U.S. Large and Small Cap Equities into U.S. Intermediate Term Taxable Fixed Income. Our goal for these adjustments is to reduce risk and rebalance portfolios after taking some of the strong moves we have seen so far this year into account.

Forecasts, estimates, and projections are not guaranteed and are based on certain assumptions and views of market and economic conditions which are subject to change.

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. Small- and mid-cap stocks are generally more volatile, subject to greater risks and are less liquid than large company stocks. 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. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investing in a volatile and uncertain commodities market may cause a portfolio to rapidly increase or decrease in value which may result in greater share price volatility.

Sector investing can be more volatile than investments that are broadly diversified over numerous sectors of the economy and will increase a portfolio’s vulnerability to any single economic, political, or regulatory development affecting the sector. This can result in greater price volatility. Investing in the Financial services companies will subject an investment to adverse economic or regulatory occurrences affecting the sector. Risks associated with the Technology sector include increased competition from domestic and international companies, unexpected changes in demand, regulatory actions, technical problems with key products, and the departure of key members of management. Technology and Internet-related stocks, especially smaller, less-seasoned companies, tend to be more volatile than the overall market.

Bloomberg Commodity Total Return Index reflects the returns that are potentially available through an unleveraged investment in the futures contracts on 19 physical commodities comprising the Index plus the rate of interest that could be earned on cash collateral invested in specified Treasury Bills. The Index is a rolling index rebalancing annually.

Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index.

S&P 500 Index is a market capitalization-weighted index composed of 500 widely held common stocks that is generally considered representative of the US stock market.

An index is unmanaged and not available for direct investment.

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.

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