Equities remain our top preference

Each month, the SSGA Investment Solutions Group (ISG) meets to debate and ultimately determine a Tactical Asset Allocation (TAA) to guide near-term investment decisions for client portfolios. Here we report on the team’s most recent discussion.

Macro backdrop

We maintain a constructive outlook for 2026, supported by multiple tailwinds, despite ongoing labor market weakness. Inflation pressures appear manageable, which should give the Federal Reserve room for further rate cuts. We expect positive economic growth in 2026, driven by the lagged impact of prior Fed cuts and additional easing ahead.

Following the anticipated December cut, we now forecast three more rate reductions in 2026, reinforcing a supportive backdrop for risk assets. Fiscal and structural supports remain intact, including stimulus from the One Big Beautiful Bill Act, corporate benefits from the restoration of Tax Cuts and Jobs Act provisions, and continued AI-driven investment, all of which should bolster business activity and sustain economic growth.

Although recent supercore measures of CPI and PCE have edged higher, we expect rental inflation to continue declining, easing upward pressure. Tariff concerns are also receding—helped by the removal of tariffs on key food products and new trade agreements with Latin American countries and Brazil, which should contain costs for imports such as coffee, bananas, and beef. This scaled-back tariff policy reduces the risk of delayed inflationary effects, making upside surprises less likely and giving the Fed greater confidence to focus on labor market conditions.

Labor remains the key weak spot. Layoffs reported by Challenger, Gray & Christmas, an outplacement firm, are elevated, and while initial jobless claims are not yet alarming, continuing claims are trending higher. The New York Fed survey showed some improvement in expectations, but other sentiment indicators confirm ongoing softness: the Conference Board survey reveals the gap between “jobs plentiful” and “jobs hard to get” has narrowed to 9.7—a level that historically declines as unemployment rises. There are some encouraging signs: labor diffusion indices have stabilized, the National Federation of Independent Business plans to increase employment remain above their long-term average, and optimism has ticked up.

The latest JOLTS report also points to resilience, with job openings rising and layoffs holding steady. Meanwhile, wage pressures have eased, though wage growth remains solid. Looking ahead, accelerated AI adoption could drive additional layoffs, adding uncertainty to labor dynamics, a risk worth monitoring.

The combination of monetary easing, fiscal stimulus, and structural drivers such as AI investment underpins our optimistic outlook for next year. Inflation risks appear contained, and with labor market weakness persisting, the Fed has room for further rate cuts, supporting market sentiment. Stronger business confidence should help stabilize labor conditions, while fiscal policy is expected to provide an additional boost to consumption.

Directional trades and risk positioning

From a quantitative perspective, our near-term market outlook remains largely unchanged. Risk appetite continues to look supportive, and our models still favor equities over bonds. With only minimal adjustments to our forecasts, we have not made any changes to tactical portfolios this month.

Despite some headline concerns, our Market Regime Indicator (MRI) ended the month close to where it began, signaling sustained positive risk sentiment. Early November brought weaker employment data and softer consumer sentiment, compounded by uncertainty from limited government reporting, which briefly dampened risk appetite. However, sentiment rebounded following the resolution of the government shutdown, strong tech earnings, and Fed commentary pointing to near-term rate cuts.

From a factor perspective, modest improvements in our S&P 500 trend measure and risk support factor were offset by less favorable sentiment spreads and higher implied volatility. Overall, the MRI continues to indicate that risk assets are well-positioned to perform.

At the asset class level, equities remain our top preference. While valuations appear stretched, strong quality factors, positive price momentum, and robust sentiment indicators continue to support our outlook. Real assets—both commodities and gold—also rank favorably in our quantitative models, with multiple factors pointing to a constructive environment ahead. For bonds, our US forecast has improved slightly, driven by ongoing mean reversion and softer equity momentum. However, we still expect equities to outperform.

Our portfolios maintain a pronounced tilt toward risk assets, with a substantial overweight in equities complemented by modest overweight positions in gold and broad commodities. To fund this risk preference, we maintain a significant underweight in aggregate bonds.

Relative value trades and positioning

From a regional equity perspective, the US remains our preferred market, though forecasts for non-US equities have improved. While valuations across the US, Pacific, and emerging markets are not compelling, strong sentiment and supportive macroeconomic factors justify maintaining overweight positions in all three regions. Conversely, we continue to hold a modest underweight in Europe, given its weak price momentum and subdued sentiment.

Within fixed income, US bond forecasts improved across the board; however, rankings remained unchanged, so no adjustments were made. Non-US bond forecasts declined, and we maintained an underweight position to fund our preference for longer-dated US bonds. We hold a small overweight in long credit and a solid allocation to long-duration US government bonds.

In our US equity sector rotation strategy, communication services, technology, and consumer staples remain at the top of our rankings, supported by strong fundamentals. Technology and communication services stand out with robust price momentum, positive sentiment indicators, and attractive quality factors. Consumer staples is supported by solid quality metrics and compelling valuations.

To see sample Tactical Asset Allocations (TAA) and learn more about how TAA is used in portfolio construction, please contact your State Street relationship manager.