Institute Alert

• Global bond markets are starting the month with a nervous glance towards upcoming government budget discussions in the U.S. and in Europe, particularly in the U.K. and France.
• Benchmark European and U.S. 30-year government bond yields are up only modestly today, but, after steadily edging higher through the summer, the cumulative increase in yields has caught the attention of equity investors.
• An added concern appears to be that Federal Reserve (Fed) Chairman Powell’s August 22 speech focused on weakness in the labor market while inflation concerns linger.

• In government bond markets, U.K. 30-year yields have touched their highest levels since 1998, while French 30-year bonds are at their highest level since 2011. The U.S. Treasury 30-year bond yield is nearly 5.0%, close to its 2025 high of 5.09%.
• The autumn budget season for European and U.S. government lawmakers reinforces investor concerns about the track of budget deficits, and the accompanying political strains have pushed the price of gold to a new all-time high. The U.S. dollar is also higher, as some global investors prefer the U.S. to European markets.
• European equity markets were broadly lower overnight, along with S&P 500 Index futures this morning.
• We do expect slower inflation in 2026, as well as a slower economy and lower short-term interest rates to moderate gains in yields.
• The S&P 500 Index is in an uptrend. We believe there is price support at the 50- and 200-day moving averages of 6316 and 5959, respectively.

• However, the near-term upward pressure on yields from the U.S. Treasury’s upcoming issuance of new long-term debt, along with questions about inflation beyond 2026, may combine to produce some near-term volatility that investors may want to avoid in long-term fixed income securities.
• We favor extending tactical positioning in areas that we believe should balance opportunity against short-term volatility risk. We illustrate this principle with our current guidance, summarized in the next section.

In fixed income, we expect to see diminishing return opportunities in short-term securities as the Fed resumes its rate cutting cycle. Meanwhile, we also foresee potential risks to long-maturity fixed income returns, as discussed above. At this time, we prefer intermediate-term (3-7 year maturities) fixed income securities to lock in higher yields than short-term securities offer and with less return volatility than long-dated maturities.

Volatility in long-term rates also may raise long-term debt financing costs at a time when the economy is slowing, and while households and businesses are still adjusting to tariff impacts. Even as the S&P 500 Index has made new all-time highs, investors may want to trim equity allocations to position portfolios ahead of the volatility we expect over the coming weeks and months.

To be clear, we still anticipate economic and earnings growth to accelerate as 2026 develops, but we believe now may be a time to rebalance portfolios, and particularly to manage positions that may have become extended during the rally in large-cap equities since April 8. On August 5, we introduced new guidance to rebalance portfolios from overweight risk to neutral. (For complete details, please see “Adjusting portfolio guidance and allocations”.) Our changes downgraded our Commodities rating from favorable to neutral. In equities, we trimmed U.S. Large Cap Equities—while maintaining a favorable rating—and downgraded U.S. Small Cap Equities from neutral to unfavorable. We favor reallocating the equity and commodity profits to U.S. Intermediate Term Taxable Fixed Income.

The goal of rebalancing is to reduce exposure where prices have become the most extended and to recycle the proceeds into potentially better values. In this way, rebalancing seeks to reduce near-term risk and to look for new potential opportunities as markets enter a likely volatile period. One way to trim large-cap exposures but still keep an overweight is to follow our sector guidance. Among the S&P 500 Index sectors, we have reduced artificial intelligence (AI) exposure by downgrading the Communication Services sector from favorable to neutral while keeping the Information Technology sector at a favorable rating. We also upgraded the Financials sector in anticipation of lower short-term interest rates and associated bank deposit costs. At the same time, we downgraded the Energy sector on concerns about excess global supplies.

Forecasts and targets are based on certain assumptions and on 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.

Investments in fixed-income securities are subject to interest rate, credit/default, liquidity, inflation, and other risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline in the bond’s price. Credit risk is the risk that an issuer will default on payments of interest and principal. This risk is higher when investing in high yield bonds, also known as junk bonds, which have lower ratings and are subject to greater volatility. If sold prior to maturity, fixed income securities are subject to market risk. All fixed income investments may be worth less than their original cost upon redemption or maturity.

U.S. government securities are backed by the full faith and credit of the federal government as to payment of principal and interest. Unlike U.S. government securities, agency securities carry the implicit guarantee of the U.S. government but are not direct obligations. Payment of principal and interest is solely the obligation of the issuer. If sold prior to maturity, both types of debt securities are subject to market risk. Although Treasuries are considered free from credit risk, they are subject to other types of risks. These risks include interest rate risk, which may cause the underlying value of the bond to fluctuate.

Equity securities are subject to market risk which means their value may fluctuate in response to general economic and market conditions and the perception of individual issuers. Investments in equity securities are generally more volatile than other types of securities. The prices of small-cap company stocks are generally more volatile than large company stocks. They often involve higher risks because smaller companies may lack the management expertise, financial resources, product diversification and competitive strengths to endure adverse economic conditions.

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.

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.

Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility. These risks are heightened in emerging markets.

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

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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