Investment Strategy

Commodities tactical outlook

Commodities, measured by the Bloomberg Commodity Index (BCOM), have been an effective diversifier this year. As markets have been hindered by strings of tariff headwinds, commodities outperformed. However, BCOM’s year-to-date performance (6%) is behind U.S. Large Cap Equities (10%) and slightly ahead of U.S. Investment Grade Fixed Income (5%), as of August 25, 2025.

Looking back

Precious Metals have led the BCOM with a 28% return year-to-date, as of August 25, 2025 (see Chart 1). Additionally, tariff concerns drove strong Industrial Metals performance through much of the year. However, with tariffs being less severe than expected, prices declined sharply. We believe this created an attractive opportunity prompting our upgrade of Industrial Metals to favorable. As for Agriculture, the sector has shown the lowest volatility, and performance has been flat, in line with its defensive characteristics. Lastly, at the bottom of the stack is Energy, which has struggled in the face of a looming surplus that also prompted our recent downgrade to neutral.

Chart 1. Bloomberg Commodity Index sector performancesSources: Bloomberg and Wells Fargo Investment Institute. Daily data from December 31, 2024 – August 25, 2025. An index is unmanaged and not available for direct investment. Past performance is no guarantee of future results.

Looking ahead

Over the coming months, we suspect that commodities could struggle to match the outperformance experienced earlier this year, before rebounding modestly in 2026 from an expected recovery in macro-economic conditions. The Energy sector, which accounts for roughly 30% of the BCOM, faces many headwinds through year-end. The unwinding of OPEC+’s¹ standing production cuts, concerns of near-term economic weaknesses, and the easing of seasonal-demand tailwinds raises the likelihood that oil markets will tilt into a surplus later this year.

As a result, we suspect that excess supply will lead to higher inventories and weigh on sentiment. Given the strong correlation between the two, weaker oil prices are likely to accompany our forecasted inventory buildup (see Chart 2).

Chart 2. Brent crude oil prices vs commercial inventoriesSources: Bloomberg, Energy Information Administration, and Wells Fargo Investment Institute. Monthly data from January 2010 – December 2026. OECD = Organization for Economic Co-operation and Development. Past performance is no guarantee of future results.

As for the Agriculture sector, we see the potential for select agricultural commodities that are facing supply shortcomings to outperform. Broadly, though, we expect sector performance to be mitigated by moderate headwinds of ample supply growth and concerns of weak export demand for the heaviest weighted agricultural commodities – corn and soybeans.

Despite the expected softening of Energy and Agriculture performances, we still see strengths in the commodity complex. Namely, we have a favorable outlook for Precious Metals and Industrial Metals. The continuation of Fed interest rate cuts and a relatively subdued U.S. dollar should support both sectors, while the modest economic recovery in 2026 and ongoing stimulus measures by the Chinese government are tailwinds specific to Industrial Metals.

Fundamentally, we expect ongoing gold purchases by global central banks and heightened geopolitical strife to support demand growth for Precious Metals. Industrial Metals also share a positive outlook as demand strengthens from improvements in manufacturing activity, the buildout of green energy, and adoption of advanced technologies. Unlike other cyclically sensitive areas, sluggish mined copper supply growth should add a tailwind that we believe will support Industrial Metal’s outperformance. Given the backdrop of a recent pullback in Industrial Metals (see Chart 1), we believe current prices offer attractive opportunities to gain sector exposure.

What to do

All in all, commodities have acted as an effective diversifier for much of 2025, but performance has softened. Additionally, our expectations for an economic soft patch, before a modest recovery in the latter part of 2026, tempers our near-term expectations for commodities to outperform. These two factors drive our neutral rating on Commodities. Within the Commodity asset class, we favor Precious Metals and Industrial Metals. We recommend that investors consider reallocating from Commodities and rotating exposure to other asset classes where we expect to have potentially stronger returns – such as Investment Grade Fixed Income or U.S. Equities.

¹ The organization of the petroleum exporting countries (OPEC) is a coalition that aims to coordinate oil production and influence global prices. The group was expanded in 2016 to form OPEC+.

Health Care remains tough for investors, but growth still works

The Health Care sector remains trapped in a repetitive scenario, continuing towards a third-consecutive year of underperformance. The Health Care sector has dramatically underperformed both the S&P 500 Index and the Information Technology sector, in part reflecting the market’s focus on artificial intelligence (AI). While sector valuations continue to moderate and look increasingly attractive relative to the overall market, the Health Care sector continues to face several challenges that have kept investors cautious on the overall group. The issues facing the Health Care sector are not homogeneous, but the problems are unique to each subsector making health care exposure more complex for investors. Pharmaceutical companies face possible tariffs and potential policies aimed at lowering drug prices. Managed Health Care companies face significant cost pressures associated with higher utilization; Life Science companies could be negatively impacted by proposed cuts to government funding; and Biotechnology companies continue to face a difficult funding environment.

While a market correction or economic downturn could push the market towards defensive stocks and help the overall Health Care sector, we believe the performance of Health Care equities will remain selective for the foreseeable future. We believe health care companies with attractive growth stories should continue to perform well. We remain constructive on the Health Care Equipment & Supplies sub-sector and medical device companies, in particular. We also expect a continued growth in mergers and acquisitions within health care, reflecting a more accommodating regulatory environment under the Trump administration.

Health Care sector performance relative to market benchmarks (2022 – 2025)Sources: FactSet and Wells Fargo Investment Institute as of August 22, 2025. An index is unmanaged and not available for direct investment. Past performance is no guarantee of future results.

A subdued Preferred Stock issuance picture

Investors are attracted to the Preferred Stock sector for the higher yields it offers from well-capitalized issuers. Preferred Stock issuance has languished over the past three years since March 2022, when the Fed aggressively raising its short-term policy interest rate to rein in inflationary pressures. Fed Chair Jerome Powell’s comments at the recent Jackson Hole meetings may provide a catalyst for lower rates and allow for a reawakening of new Preferred Stock and hybrid security issuance.

Over the past three years, Preferred Stock and hybrid issuance for investors has been about one-fourth of the three-year period of issuance prior to the rate-hiking cycle. While new issuance has been low, redemptions have continued, which has resulted in a smaller preferred and hybrid market for investors. The chart shows the increase in issuance prior to the rate-hiking cycle and the decline in outstanding Preferred Stock since its peak in 2022.

Preferred Securities outstandingSources: ICE BofA Fixed Rate Preferred Securities Index and Wells Fargo Investment Institute. Quarterly data from June 2015 to June 2025 as of August 25, 2025. An index is unmanaged and not available for direct investment.

While Preferred Stock yields remain attractive relative to recent history, we do see some spread and yield compression in the preferred market, especially for lower-rated and less-liquid securities. Given our unfavorable guidance for U.S. Long Term Taxable Fixed Income, we believe investors should evaluate their Preferred Stock holdings and consider repositioning toward higher-quality, more liquid preferred stocks or intermediate-term bond positions. U.S. Intermediate Term Taxable Fixed Income remains among our most favorable allocation recommendations.

Our outlook for Preferred Stock new issuance remains mixed as bank capital levels remain strong. However, infrastructure demands for utility and telecommunications companies may drive some near-term issuance. If long-term rates remain elevated, new Preferred Stock issuance will likely remain below average despite Powell’s recent comments.

Potential benefits of private market diversification

Despite muted returns in recent years, private markets continue to demonstrate long-term performance that we believe supports incorporating private-capital strategies into a diversified portfolio. While Venture Capital’s outsized returns in 2020–2021 may be outliers, many sub-strategies have delivered solid results across economic cycles. As shown in the chart, alternative sub-strategy returns vary significantly year-to-year. A portfolio diversified across private-capital strategies may offer a more stable return profile over time (see table below).

We believe qualified investors allocating across the full spectrum of private-market strategies may mitigate the impact of underperforming segments and reduce overall volatility. Over a 15-year horizon, returns ranged from 15.0% for Growth Equity to 7.9% for Direct Lending. A blended allocation across all sub-strategies yielded a horizon internal rate of return (IRR) of 12.4%.

We maintain favorable guidance on Growth Equity and Small/Mid Buyout strategies and remain constructive on Infrastructure and Secondaries. Looking ahead, fading economic uncertainty may support a recovery in merger and acquisition activity. Additionally, lower short-term interest rates could improve the subdued Private Equity exit environment and spur deal activity.

Annual performance of various private-capital strategies (2019- 2024)

2019	2020	2021	2022	2023	2024	15-Year Horizon IRR*
Growth Equity 17.6%	Venture Capital 40.5%	Venture Capital 53.6%	Infrastructure 9.8%	Direct Lending 13.2%	Growth Equity 10.6%	Growth Equity 15.0%
Venture Capital 17.3%	Growth Equity 33.7%	Growth Equity 50.3%	Private Real Estate 7.8%	Buyout 10.8%	Secondaries 9.1%	Buyout 14.7%
Buyout 16.9%	Buyout 26.2%	Secondaries 43.1%	Direct Lending 6.2%	Infrastructure 10.4%	Buyout 9.1%	Secondaries 13.2%
Private capital 11.9%	Private capital 18.3%	Buyout 37.7%	Secondaries 4.5%	Private capital 6.9%	Infrastructure 8.5%	Venture Capital 12.7%
Secondaries 10.6%	Secondaries 8.1%	Private capital 34.5%	Private capital 0.6%	Secondaries 6.1%	Private capital 7.5%	Private capital 12.4%
Private Real Estate 9.3%	Infrastructure 7.2%	Private Real Estate 25.9%	Buyout -0.9%	Growth Equity 6.0%	Direct Lending 6.5%	Private Real Estate 9.6%
Infrastructure 7.1%	Direct Lending 5.5%	Infrastructure 15.7%	Growth Equity -6.3%	Venture Capital -4.8%	Venture Capital 3.7%	Infrastructure 9.2%
Direct Lending 7.0%	Private Real Estate 4.6%	Direct Lending 13.3%	Venture Capital -16.7%	Private Real Estate -4.8%	Private Real Estate -0.8%	Direct Lending 7.9%

Sources: Pitchbook. Data as of December 31, 2024. A horizon IRR is a capital-weighted pooled calculation that shows the IRR at a certain point in time. The horizon IRRs listed in the chart are one-year pooled IRRs by strategy type of funds available in the Pitchbook database. Note: The various strategy groupings listed in the chart include all fund information available in the Pitchbook private-capital database that are classified under the specified strategy types. Past performance is no guarantee of future results. *Horizon IRRs: One- or fifteen-year pooled IRR by strategy.

Alternative investments, such as hedge funds, private equity, private debt and private real estate funds are not appropriate for all investors and are only open to “accredited” or “qualified” investors within the meaning of U.S. securities laws.

Cash Alternatives and Fixed Income

Equities

Real Assets

Alternative Investments**

Source: Wells Fargo Investment Institute, September 2, 2025.

*Tactical horizon is 6-18 months

**Alternative investments are not appropriate for all investors. They are speculative and involve a high degree of risk that is appropriate 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. Please see end of report for important definitions and disclosures.

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. 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. High yield (junk) bonds have lower credit ratings and are subject to greater risk of default and greater principal risk. Preferred securities are subject to interest rate and credit risks. Interest rate risk is the risk that preferred securities will decline in value because of changes in interest rates. Credit risk is the risk that an issuer will default on payments of interest and principal. 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 gold, silver or other precious metals involves special risk considerations such as severe price fluctuations and adverse economic and regulatory developments affecting the sector or industry. Real estate has special risks including the possible illiquidity of underlying properties, credit risk, interest rate fluctuations and the impact of varied 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.

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 appropriate 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.

Hedge fund strategies, such as Equity Hedge, Event Driven, Macro and Relative Value, may expose investors to the risks associated with the use of short selling, leverage, derivatives and arbitrage methodologies. Short sales involve leverage and theoretically unlimited loss potential since the market price of securities sold short may continuously increase. The use of leverage in a portfolio varies by strategy. Leverage can significantly increase return potential but create greater risk of loss. Derivatives generally have implied leverage which can magnify volatility and may entail other risks such as market, interest rate, credit, counterparty and management risks. Arbitrage strategies expose a fund to the risk that the anticipated arbitrage opportunities will not develop as anticipated, resulting in potentially reduced returns or losses to the fund.

Bloomberg Commodity Index is comprised of 22 exchange-traded futures on physical commodities and represents 20 commodities weighted to account for economic significance and market liquidity.

ICE BofA Fixed Rate Preferred Securities Index consists of fixed rate U.S. dollar denominated preferred securities and fixed-to-floating rate securities that are callable prior to the floating rate period and are at least one year from the start of the floating rate period. Securities must be rated investment grade including the country of risk and must be issued as public securities or 144a filing and a minimum outstanding of $100 million. The index includes perpetual preferred securities, American Depository Shares/Receipts (ADS/R), domestic and Yankee trust preferred securities having a minimum remaining term of at least one year, both DRD-eligible and non-DRD eligible preferred stock and senior debt.

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.

S&P 500 Health Care Index comprises those companies included in the S&P 500 that are classified as members of the GICS® health care sector.

S&P 500 Information Technology Index comprises those companies included in the S&P 500 that are classified as members of the GICS® information technology sector.

An index is unmanaged and not available for direct investment.

Investment Grade bonds - A rating that indicates that a municipal or corporate bond has a relatively low risk of default. Bond rating firms, such as Standard & Poor's, use different designations consisting of upper- and lower-case letters 'A' and 'B' to identify a bond's credit quality rating. 'AAA' and 'AA' (high credit quality) and 'A' and 'BBB' (medium credit quality) are considered investment grade. Credit ratings for bonds below these designations ('BB', 'B', 'CCC', etc.) are considered low credit quality, and are commonly referred to as "junk bonds".

PitchBook benchmarks

Private Capital – The aggregation of all private market funds. Inclusive of Private Equity, Venture Capital, Private Debt, Real Estate, Real Assets, Fund of Funds, Secondaries, and Co-investments.

Buyout – Private equity funds that primarily focus on purchasing at least a controlling percentage of a company's stock to take over its assets and operations.

Growth/Expansion – Private equity funds that make minority (non-control) equity investments.

Venture Capital : Early Stage – Venture capital funds that focus specifically on earlier rounds (Seed, First, Second). Later Stage – Venture capital funds that focus specifically on later rounds (Third and beyond).

Direct Lending – This fund provides a source of capital for companies, often in the form of senior financing alternatives, including revolving credit facilities, term loans, delayed draw term loans, second lien loans, and unitranche facilities. These loans often support platform acquisitions, portfolio company add-ons, recapitalization, and refinancings. The objective is to provide the fund's investors with high current income, emphasizing capital preservation and attractive risk-adjusted returns.

Real Estate – This fund type indicates private equity funds that invest in buildings and land.

Infrastructure – This fund type indicates funds that invest specifically in infrastructure, including roads, canals, airports, power lines, etc. Funds focused on Infrastructure Core, Infrastructure Value Added, Infrastructure Opportunistic, or Infrastructure Greenfield are not included as we have specific Fund types for each.

Secondaries – Private equity funds that invest in limited partnership interests of funds that have already been raised or directly purchase companies from other fund managers.

Pitchbook data composition:

PitchBook’s fund returns data is sourced primarily from individual LP reports, serving as the baseline for our estimates of activity across an entire fund. For any given fund, return profiles will vary for LPs due to a range of factors, including fee discounts, timing of commitments, and inclusion of co-investments. This granularity of LP-reported returns—all available on the PitchBook Platform—provides helpful insight to industry practitioners but results in discrepancies that must be addressed when calculating fund-level returns.

To be included in pooled calculations, a fund must have: (i) at least one LP report within two years of the fund’s vintage, and (ii) LP reports in at least 45% of applicable reporting periods. To mitigate discrepancies among multiple LPs reporting, the PitchBook Benchmarks (iii) determine returns for each fund based on data from all LP reports in a given period. For periods that lack an LP report, (iv) a straight-line interpolation calculation is used to populate the missing data; interpolated data is used for approximately 10% of reporting periods, a figure that has been steadily declining.

PitchBook’s fund returns data is sourced primarily from individual LP reports, serving as the baseline for our estimates of activity across an entire fund. For any given fund, return profiles will vary for LPs due to a range of factors, including fee discounts, timing of commitments, and inclusion of co-investments. This granularity of LP-reported returns—all available on the PitchBook Platform—provides helpful insight to industry practitioners but results in discrepancies that must be addressed when calculating fund-level returns.

To be included in pooled calculations, a fund must have: (i) at least one LP report within two years of the fund’s vintage, and (ii) LP reports in at least 45% of applicable reporting periods. To mitigate discrepancies among multiple LPs reporting, the PitchBook Benchmarks (iii) determine returns for each fund based on data from all LP reports in a given period. For periods that lack an LP report, (iv) a straight-line interpolation calculation is used to populate the missing data; interpolated data is used for approximately 10% of reporting periods, a figure that has been steadily declining.

We strive to maintain consistency from edition to edition of PitchBook Benchmarks, but fund classifications will change occasionally, and new funds will be incorporated into the dataset as we gather more information.

All returns data in this report is net of fees and carry.

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.

The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability or best interest analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. The material contained herein has been prepared from sources and data we believe to be reliable but we make no guarantee to its accuracy or completeness.

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