Tactical Update: Checking In on the 60/40 Portfolio
Additional content provided by Kent Cullinane, Analyst, Research.
The classic 60/40 portfolio has weathered its fair share of storms (and criticisms) in recent times, and 2025 is shaping up to be a year defined by complexity, volatility, and recalibration for asset allocators. As we move through the second quarter, the LPL Research Strategic and Tactical Asset Allocation Committee (STAAC) has made several recent adjustments to our Tactical Asset Allocation (TAA) 60/40 strategy, which aligns with our Growth with Income (GwI) Investment Objective (IO), to reflect the evolving macroeconomic and market landscape. While economic and policy uncertainty remains high, we believe opportunities persist for those willing to stay nimble and diversified.
Equities: A Balancing Act
April brought turbulence to equity markets, with the S&P 500 ending the month modestly lower after a sharp mid-month sell-off driven by tariff headlines. A temporary 90-day pause in new tariffs helped stabilize sentiment, but the broader environment remains fragile. In this environment of trade policy uncertainty, when conviction levels are not high, the STAAC believes it is prudent to keep tactical asset allocations closer to benchmarks than in times when there is more economic clarity. Overall, we are neutral equities.
The STAAC’s Key Tactical Equity Views
- U.S. Equities Downgraded to Neutral.With tariff uncertainty clouding the outlook, the Committee has taken a more cautious stance on domestic equities, moving geographic exposure back to benchmark levels.
- Large Caps Still in Favor.In a slowing economy, large caps offer stronger balance sheets and earnings resilience.
- Growth vs. Value.While growth stocks remain favored due to tech-driven earnings strength in a slow-growth environment, technicals suggest a more balanced approach. Defensive value names may outperform if volatility returns.
- Emerging Markets (EM) Upgraded to Neutral.Improved technicals, attractive valuations, and a weaker dollar support a more constructive view — especially for EM countries outside China benefiting from supply chain shifts.
Fixed Income: Quality First
The bond market continues to reflect a tug-of-war between sticky inflation and slowing growth. April saw the Bloomberg U.S. Aggregate Bond Index notch its fourth consecutive monthly gain, rising 0.4%. However, volatility remains elevated, and the yield curve has steepened as long-term rates rise. Overall, we are neutral fixed income from a tactical perspective.
The STAAC’s Key Tactical Fixed Income Views
- Focus on Quality.Riskier sectors remain expensive, and while spread widening is a step toward normalization, core sectors still offer a better risk-reward trade off.
- Neutral Duration.With yields directionless amid conflicting macro signals, the Committee maintains a neutral stance on duration, and we expect further volatility in fixed income markets.
- Mortgage-Backed Securities (MBS) Overweight, Investment-Grade (IG) Corporates Underweight.Mortgage-backed securities continue to offer relative value, while investment-grade corporates face valuation headwinds.
Alternatives: Dispersion Creates Opportunity
Our 60/40 (GwI) Tactical Asset Allocation is overweight alternative investments (funded by a cash underweight relative to benchmark levels). Alternative strategies delivered mixed results in April, but the environment remains favorable for active management in this space. We favor strategies that can benefit from fundamental and macro dispersions, elevated volatility, and medium-to-high interest rates, all of which we believe will continue going forward.
The STAAC’s Key Tactical Alternative Investment Views
- Favor Flexibility.Strategies that can capitalize on macro and fundamental dispersion — such as Global Macro, Managed Futures, and Multi-Strategy — are well-positioned.
- Volatility as a Tailwind.Moderate volatility and elevated interest rates create a fertile ground for excess return generation.
LPL Research Growth with Income (60/40) Tactical Asset Allocation
Source: LPL Research, 05/20/25
Tactical Summary: Stay Nimble, Stay Diversified
The STAAC’s latest tactical shifts reflect a market caught between competing forces — slowing growth, persistent inflation, and geopolitical and policy uncertainty. In this environment, we believe that staying close to benchmark in areas of low conviction, while leaning into quality and diversification, remains a prudent approach while we wait for more visibility into the potential effects of the new tariff environment on earnings and economic growth. We continue to believe the demise of the traditional 60/40 portfolio has been greatly exaggerated, and it is still an important portfolio construction tool, lending itself to capturing opportunities in both the equity and fixed income markets, but a tool that works best when stock-bond correlations are negative. Periods of elevated inflation have historically been associated with positive stock-bond correlation (the 21-day rolling correlation has recently flipped positive) supporting our belief that on a tactical basis, the traditional 60/40 can be supplemented through the addition of an allocation to diversifying alternative strategies with lower correlations to traditional asset classes.
Important Disclosures
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk.
Indexes are unmanaged and cannot be invested into directly. Index performance is not indicative of the performance of any investment and does not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
This material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.
Asset Class Disclosures –
International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.
Bonds are subject to market and interest rate risk if sold prior to maturity.
Municipal bonds are subject and market and interest rate risk and potentially capital gains tax if sold prior to maturity. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply.
Preferred stock dividends are paid at the discretion of the issuing company. Preferred stocks are subject to interest rate and credit risk. They may be subject to a call features.
Alternative investments may not be suitable for all investors and involve special risks such as leveraging the investment, potential adverse market forces, regulatory changes and potentially illiquidity. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.
Mortgage backed securities are subject to credit, default, prepayment, extension, market and interest rate risk.
High yield/junk bonds (grade BB or below) are below investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.
Precious metal investing involves greater fluctuation and potential for losses.
The fast price swings of commodities will result in significant volatility in an investor's holdings.
This research material has been prepared by LPL Financial LLC.
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