Market Pulse: Key Risks and Opportunities for Year-End Positioning

Garrett Fish (00:00):

Hello everyone. I'm Garrett Fish, Head of Model Portfolio Management here at LPL Financial. Today on Street View, we're taking a closer look at the current state of the financial markets, what's driving investment sentiment, where risks are emerging, and what opportunities are presenting themselves as we head into the final stretch of the year. Let's dive into the key themes shaping our portfolios right now. We'll start with some of the headwinds investors are facing, first, persistent inflation. While headline inflation has cooled, core inflation remains sticky at around 3% year over year. This is keeping the Federal Reserve cautious with modest expectations for rate cuts. Investors hoping for a more dovish turn may need to remain patient. Second, lingering effects of rate hikes. Even with the Fed starting to ease borrowing costs remain elevated. Commercial real estate is under pressure with cap rates expanding and lenders demanding more equity.

Garrett Fish (01:03):

Multifamily and office sectors are especially sensitive, and we're seeing stress in refinancing activity in valuations. Third, geopolitical uncertainty. While oil prices have subsided since earlier in the summer, any disruption in global oil supply, particularly through key shipping routes, could trigger inflation shocks and ripple through energy sensitive sectors. Geopolitical risk remains a wild card that can move markets quickly. Fourth, election year volatility. With the 2026 election cycle approaching, policy uncertainty is rising. Markets tend to be jittery in pre-election periods, especially around taxes, regulation, and trade. Campaign rhetoric can stir up short term volatility, even when long term fundamentals remain intact. It's worth remembering that market volatility is normal. Over the past 20 years, the average calendar year drawdown has been 14.6%. Now let's shift to the opportunities we're seeing. First, strong corporate earnings Q3 year over year earnings growth for the S&P 500 is tracking above 9%, with more than 80% of the companies beating estimates so far.

Garrett Fish (02:25):

AI driven innovation continues to support margins. Despite macro headwinds, corporate America is showing remarkable resilience. Second, consumer spending strength. Consumer spending remains solid with 3.7% year over year growth. Travel, dining and entertainment are strong, especially among higher income households. The labor market is softening slightly, but wage growth continues to support demand. Third, attractive income opportunities. Bond yields are compelling. Again, the 10-year U.S. Treasury yield is hovering around 4%, near its highest level in two decades. Fixed income is once again a meaningful source of return and portfolio stability. Fourth, benefits of diversification. Diversification remains one of the most powerful tools available to investors. By spreading investments across asset classes, sectors, and geographies, you reduce the impact of any single market event on your overall portfolio. A well-balanced 60/40 portfolio, with 60% inequities and 40% in fixed income, has historically delivered strong risk adjusted returns.

Garrett Fish (03:47):

It offers growth potential through equities, while fixed income provides income and downside protection. Over longer time periods, returns for a 60/40 portfolio tend to fall within a narrower range than over shorter time horizons, helping investors stay invested through market cycles and avoid emotional decision making. It's a strategy that rewards discipline and patience. So whether you're managing risk or positioning for opportunity, remember, a diversified portfolio remains your best defense against market uncertainty. Thanks for joining me for this edition of Street View. We'll be back in two weeks with more insights to help you stay ahead of the curve. Until then, stay informed, stay focused, and stay invested. And of course, you can follow LPL Research on social media.