Due Diligence
Iran Escalation: How Markets Have Reacted to Geopolitical Events
Last Updated:
Additional content provided by Kent Cullinane, Sr. Analyst, Research.
As with the recent escalation in the Middle East, financial markets are constantly exposed to unpredictable events — from geopolitical conflicts and terror attacks to political transitions, corporate crises, and systemic financial shocks. While each new development tends to generate uncertainty and anxiety, history consistently shows that markets are far more resilient than most investors expect.
Reviewing market reactions across more than eight decades of market history helps us understand how stocks typically behave when the unexpected happens, and which conditions matter most to determine the likely depth and duration of any drawdowns. It is important to note that past performance does not guarantee future results.
Immediate Market Reactions: Sometimes Sharp but Often Short-Lived
Across more than two dozen major geopolitical events since World War II, the S&P 500 has produced an average one-day decline of just -1%. In other words, even seemingly dramatic world events tend to trigger declines that are notable, but not catastrophic. Typically, markets tend to absorb shocks quickly, stabilize (bottoming on average within 18 days), and recover within a matter of weeks (the average time taken for the S&P 500 to get back to pre-event levels is under 39 days). Importantly, the scale of the initial event rarely predicts the magnitude of the market impact.
Stocks Largely Take Geopolitical Events in Stride
S&P 500 Index Returns and Select Geopolitical Event
| Market Shock Events | Event Date | One Day | Total Drawdown | Bottom (Days) | Recovery (Days) |
| Pearl Harbor Attack | 12/7/1941 | -3.8% | -19.8% | 143 | 307 |
| North Korea Invades South Korea | 6/25/1950 | -5.4% | -12.9% | 23 | 82 |
| Hungarian Uprising | 10/23/1956 | -0.2% | -0.8% | 3 | 4 |
| Suez Crisis | 10/29/1956 | 0.3% | -1.5% | 3 | 4 |
| Cuban Missile Crisis | 10/16/1962 | -0.3% | -6.6% | 8 | 18 |
| Kennedy Assassination | 11/22/1963 | -2.8% | -2.8% | 1 | 1 |
| Gulf of Tonkin Incident | 8/2/1964 | -0.2% | -2.2% | 25 | 41 |
| Six-Day War | 6/5/1967 | -1.5% | -1.5% | 1 | 2 |
| Tet Offensive | 1/30/1968 | -0.5% | -6.0% | 36 | 65 |
| Munich Olympics | 9/5/1972 | -0.3% | -4.3% | 42 | 57 |
| Yom Kippur War | 10/6/1973 | 0.3% | -0.6% | 5 | 6 |
| Reagan Shooting | 3/30/1981 | -0.3% | -0.3% | 1 | 2 |
| Iraq’s Invasion of Kuwait | 8/2/1990 | -1.1% | -16.9% | 71 | 189 |
| U.S. Terrorist Attacks | 9/11/2001 | -4.9% | -11.6% | 11 | 31 |
| Madrid Bombing | 3/11/2004 | -1.5% | -2.9% | 14 | 20 |
| London Subway Bombing | 7/5/2005 | 0.9% | 0% | 1 | 4 |
| Boston Marathon Bombing | 4/15/2013 | -2.3% | -3.0% | 4 | 15 |
| Bombing of Syria | 4/7/2017 | -0.1% | -1.2% | 7 | 18 |
| North Korea Missile Crisis | 7/28/2017 | -0.1% | -1.5% | 14 | 36 |
| Saudi Aramco Drone Strike | 9/14/2019 | -0.3% | -4.0% | 19 | 41 |
| Iranian General Killed in Airstrike | 1/3/2020 | -0.7% | -0.7% | 1 | 5 |
| U.S. Pulls Out of Afghanistan | 8/30/2021 | 0.4% | -0.1% | 1 | 3 |
| Escalation of Russia/Ukraine Conflict | 2/17/2022 | -2.1% | -6.8% | 13 | 23 |
| Israel-Hamas War | 10/9/2023 | 0.3% | -4.5% | 14 | 19 |
| Iran Attacks on Israel | 4/14/2024 | -1.2% | -3.0% | 5 | 15 |
| U.S-Israeli Attacks on Iran | 6/21/2025 | 1.0% | 0% | 0 | 0 |
| Iranian Supreme Leader Killed | 2/28/2026 | 0% | ? | ? | ? |
| Average | -1.0% | -4.4% | 17.9 | 38.8 | |
Source: LPL Research, Bloomberg, FactSet, S&P Dow Jones Indices, CFRA, Strategas 3/2/26
Disclosure: All indexes are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results. The modern design of the S&P 500 index was first launched in 1957. Performance before then incorporates the performance of its predecessor index, the S&P 90.
How do Stocks Perform After Major Events?
Looking at a wider list of historical events, from Pearl Harbor to the Cuban Missile Crisis, from the 1987 stock market crash to 9/11, and from Brexit to the Russia–Ukraine conflicts, stocks have repeatedly demonstrated resilience. The consistent takeaway is that shocks cause volatility, but rarely change the long-term trajectory of the economy unless accompanied by deeper fundamental stress.
In reviewing more than 40 major events, from wars to political resignations, corporate failures, terror attacks, natural disasters, currency crises, and pandemics, a few universal lessons emerge:
- Markets dislike uncertainty but tend to adapt quickly.
- The economic backdrop matters more than the event itself.
- Shocks rarely alter long-term fundamentals, though sometimes can deepen a recession.
How Do Stocks Perform After Major Events?
S&P 500 Index Performance After Select Major Geopolitical and Historical Events
| Market Shock Events | Event Date | 1 Month | 3 Months | 6 Months | 12 Months | Near a Recession |
| Germany Invades France | 5/10/1940 | -19.9% | -12.7% | -4.5% | -18.7 | No |
| Pearl Harbor Attacks | 12/7/1941 | -1.0% | -11.0% | -6.5% | 4.3% | No |
| North Korea Invades South Korea | 6/25/1950 | -10.0% | 1.6% | 4.1% | 11.7% | No |
| Hungarian Uprising | 10/23/1956 | -2.1% | -2.8% | -1.3% | -11.7% | Yes |
| Suez Crisis | 10/29/1956 | -4.4% | -3.6% | 0% | -11.6% | Yes |
| Cuban Missile Crisis | 10/16/1962 | 5.1% | 14.1% | 20.7% | 27.8% | No |
| Kennedy Assassination | 11/22/1963 | 6.8% | 11.9% | 15.5% | 23.2% | No |
| Gulf of Tonkin Incident | 8/2/1964 | -1.6% | 1.9% | 5.3% | 2.7% | No |
| Six-Day War | 6/5/1967 | 3.3% | 5.9% | 7.5% | 13.5% | No |
| Tet Offensive | 1/30/1968 | -3.8% | 5.1% | 5.2% | 10.2% | No |
| Penn Central Bankruptcy | 6/21/1970 | -0.1% | 7.2% | 16.8% | 28.6% | Yes |
| Munich Olympics | 9/5/1972 | -1.0% | 5.7% | 2.3% | -5.8% | No |
| Yom Kippur War | 10/6/1973 | -3.9% | -10.7% | -15.3% | -43.2% | Yes |
| Oil Embargo | 10/16/1973 | -7.0% | -13.2% | -14.4% | -35.2% | Yes |
| Nixon Resigns | 8/9/1974 | -14.4% | -7.0% | -2.8% | 6.4% | Yes |
| Reagan Shooting | 3/30/1981 | -0.9% | -1.8% | -14.0% | -16.4% | Yes |
| Continental Illinois Bailout | 5/9/1984 | -3.1% | 1.0% | 6.4% | 12.8% | No |
| 1987 Stock Market Crash | 10/19/1987 | 8.1% | 10.9% | 14.7% | 22.9% | No |
| Iraq’s Invasion of Kuwait | 8/2/1990 | -8.2% | -13.5% | -2.1% | 10.1% | Yes |
| Soros Breaks Bank of England | 9/16/1992 | -2.5% | 3.0% | 6.8% | 9.9% | No |
| First World Trade Center Bombing | 2/26/1993 | 1.7% | 2.0% | 4.0% | 4.7% | No |
| Asian Financial Crisis | 10/8/1997 | -3.7% | -1.8% | 14.1% | -1.5% | No |
| U.S.S. Cole Yemen Bombing | 10/12/2000 | 2.7% | -0.9% | -11.3% | -19.6% | Yes |
| U.S. Terrorist Attacks | 9/11/2001 | -0.2% | 2.5% | 6.7% | -18.4% | Yes |
| Iraq War Started | 3/20/2003 | 1.9% | 13.6% | 18.7% | 26.7% | No |
| Madrid Bombing | 3/11/2004 | 3.5% | 2.7% | 1.5% | 8.4% | No |
| London Subway Bombing | 7/5/2005 | 3.3% | 1.8% | 5.3% | 5.5% | No |
| Bear Stearns Collapses | 3/14/2008 | 3.6% | 5.6% | -2.8% | -41.5% | Yes |
| Lehman Brothers Collapses | 9/15/2008 | -16.3% | -26.2% | -34.8% | -11.7% | Yes |
| Boston Marathon Bombing | 4/15/2013 | 6.3% | 8.4% | 9.7% | 17.9% | No |
| Russia Annexes Crimea | 2/20/2014 | 1.5% | 2.6% | 8.0% | 14.7% | No |
| BREXIT | 6/24/2016 | 6.5% | 6.2% | 11.0% | 19.7% | No |
| Bombing of Syria | 4/7/2017 | 1.8% | 3.1% | 7.6% | 12.8% | No |
| North Korea Missile Crisis | 7/28/2017 | -1.1% | 3.6% | 14.8% | 13.4% | No |
| Saudi Aramco Drone Strike | 9/14/2019 | -1.4% | 5.4% | -8.8% | 12.5% | Yes |
| Iranian General Killed in Airstrike | 1/3/2020 | 1.9% | -23.1% | -4.2% | 14.4% | Yes |
| U.S. Pulls Out of Afghanistan | 8/30/2021 | -3.7% | 2.8% | -4.34% | -12.0% | No |
| Escalation of Russia/Ukraine Conflict | 2/17/2022 | 1.8% | -10.9% | -2.2% | -6.9% | No |
| Israel-Hamas War | 10/7/2023 | 1.6% | 9.0% | 20.8% | 32.2% | No |
| Iran Attacks on Israel | 4/14/2024 | 2.4% | 9.9% | 14.4% | 5.5% | No |
| U.S-Israeli Attacks on Iran | 6/21/2025 | 1.2% | 12.2% | 15.3% | ? | No |
| Iranian Supreme Leader Killed | 2/28/2026 | ? | ? | ? | ? | ? |
| Average | -1.1% | 0.5% | 3.1% | 3.0% | ||
| Average if no recession | 0.2% | 3.8% | 8.0% | 9.8% | ||
| Average if recession | -3.6% | -5.9% | -6.3% | -9.8% | ||
Source: LPL Research, Bloomberg, FacSet, S&P Dow Jones Indices, CFRA, Strategas 03/03/26
Disclosures: All indexes are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results. The modern design of the S&P 500 index was first launched in 1957. Performance before then incorporates the performance of its predecessor index, the S&P 90.
The Real Differentiator: Recession vs. No Recession
The single most important factor determining market performance after a shock is whether the economy is already in or near a recession. If a shock occurs during an expansion, then markets are typically flat to modestly positive over the next month followed by positive returns over the next three, six, and 12 months (average 12-month post-shock return in non-recessionary periods: +9.8%). However, if a shock occurs near a recession, markets tend to fall across all timeframes, and the average 12-month post-shock return near recessions is -9.8%. This pattern makes intuitive sense: shocks can add volatility, but they rarely derail a fundamentally sound economy; however, if conditions are already fragile, the event can accelerate or amplify existing weakness.
Cross Asset Market Behavior During Shock Events
Equities: Shock events often temporarily rotate leadership toward utilities, staples, gold miners, and defense stocks. Growth-oriented and cyclical sectors typically lag amid growth fears during the volatility window, but rebound as uncertainty fades. Other equity asset classes tend to behave in somewhat predictable ways with small caps tending to lag as volatility increases, and a strong U.S. dollar, often a safe haven in times of geopolitical conflict, also tends to weigh on (unhedged) non-U.S. equities.
Fixed Income: Shock events tend to trigger flight-to-safety buying, pushing Treasury yields lower as rate policy expectations adjust, particularly if growth expectations deteriorate. If energy prices are affected due to supply disruptions (e.g., in an oil shock) and inflation expectations rise, yields may initially move higher before falling back as risk aversion builds.
Oil and the Energy Sector: Energy markets frequently embed a temporary risk premium following geopolitical stress. Historically, and as markets exhibited this week, oil prices spike on perceived supply risk, energy equities often outperform, but price pressures fade once physical supply and distribution prove resilient.
Gold and Precious Metals: Gold remains one of the most reliable safe haven assets during global shocks. Patterns typically seen include strong initial inflows and continued strength when/if inflation expectations rise as a result of the shock. However, as evidenced in trading on March 3, a surging dollar on safe-haven flows can put downward pressure on precious metals, especially when the metals are technically overbought after a strong rally.
Conclusion: Shock Events are Unsettling but Typically Secondary Drivers for Markets
While global disruptions can feel destabilizing in real time, history supports a disciplined, long-term investment approach, though past performance does not guarantee future results. Shock events introduce volatility, but rarely do lasting damage, unless underlying economic conditions are already deteriorating. For investors, we believe the key is not to predict the next headline, but to understand the cycle, maintain diversification, and try to avoid emotional decision-making during periods of short-term turbulence. The LPL Research Strategic and Tactical Asset Allocation Committee (STAAC) maintains its neutral tactical stance on equities but continues to monitor developments in the Middle East closely to determine the potential impact on the energy sector, broader equity markets, gold and precious metals, and the path of interest rates.
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.
Not Insured by FDIC/NCUA or Any Other Government Agency | Not Bank/Credit Union Deposits or Obligations | Not Bank/Credit Union Guaranteed | May Lose Value
For Public Use – Tracking: #1073427
Risk-On Appetite Strong in 2026: Fund Flows Recap
Last Updated:
Additional content provided by Kent Cullinane, Sr. Analyst, Research.
With February behind us, we conducted a deeper dive into exchange-traded fund (ETF) flows over the month and year-to-date (YTD) periods. Flows measure the net movement of cash into and out of investment vehicles, such as mutual funds and exchange-traded funds (ETF). We analyzed flows to gain insight on investor demand and sentiment surrounding asset classes, sectors, and other segments of markets.
Broad Asset Class Flows
At the broad asset class level, investors continued to pour into equity ETFs, which now represent 78% (~$11 trillion) of the total ETF market, with February realizing a net flow of $139 billion, putting the YTD flows at $214 billion. Despite the volatility, with the S&P 500 marginally up at 0.7% to start the year following a slight drawdown in February (-0.8%), capital continues to pile into stocks. The artificial intelligence (AI) trade that propelled equities higher over the last few years has begun to unwind with stocks in more AI-oriented industries (and some others threatened by AI cannibalizing their industries) leading markets lower. While some view the AI drawdown as a buying opportunity, others see cracks in the AI buildout starting to reverberate across other segments of the market. Nonetheless, stocks continue to see strong flows and have brought in nearly a trillion in assets over the trailing one-year period at month-end.
Fixed income, following a strong 2025 as measured by the Bloomberg U.S. Aggregate Bond Index (AGG) rising 7.3%, saw meaningful flows in February at $57 billion, bringing the YTD total to $122 billion. Fixed income ETFs represent nearly 17% ($2.4 trillion) of the total ETF market, or roughly a quarter the size of the equity ETF market – combined they represent 95% of ETF assets. Although they are overshadowed by the equity market, they continue to punch above their weight by gathering more assets on a relative size basis. Despite the Federal Reserve’s (Fed) decision to lower interest rates three times in 2025, bonds continue to have an attractive yield relative to history and we believe core bonds (Treasurys, investment-grade corporate bonds, and mortgage-backed securities (MBS)) in particular represent an equally attractive risk-reward trade-off as equities. Investors looking to escape equity market volatility have been rewarded moving into the generally steadier, less volatile asset class.
Across diversifying strategies, including commodities, alternative investments, currencies and allocation ETFs, commodities was the standout amassing $7.7 billion in assets in February, with YTD flows closing out the month at $13.6 billion. Commodities represent nearly 3% of the ETF marketplace with $417 billion in assets. One of the largest segments of the commodity market is precious metals, with gold being the dominant metal by market size and volume. Gold surged in 2025, rising over 50%, as its safe haven status intrigued investors facing increased geopolitical uncertainty, expectations of lower interest rates (lower yields reduce the opportunity cost of holding gold), and a weaker U.S dollar (USD) (USD weakness increased the purchasing power of gold). The other diversifying strategies (alternatives, currency, and allocation) saw mixed flows over the month, with alternatives and allocation strategies gaining nearly $3.3 billion and $1.9 billion, respectively, and currency (which includes digital currencies) realizing an outflow of $1.6 billion – not surprising given the significant sell-off in digital assets, most notably Bitcoin (BTC) slashing nearly half its value since October’s all-time high.
Investors Remain Risk-On Despite Choppy Equity Markets
Trailing one-month, YTD, and one-year Net Asset Flows Across Broad Asset Classes (AUM, Billions $)
Source: LPL Research, Factset, 2/27/26
Disclosures: Indexes are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results.
Asset Class Specific Flows
Equities
Within equities, U.S. large cap equities was the largest equity segment by flows over the month and YTD periods, gathering $24.7 billion and $28.2 billion, respectively. U.S. large cap equities dwarf all other segments in terms of assets at $3.7 trillion, representing nearly 26% of the ETF market, with the next closest segment (U.S. total market) at $1.3 trillion (~9%). While volatility has increased, leading investors to rotate out of high-flying growth stocks and into more defensive value stocks, domestic markets continue to benefit from AI, impressive corporate earnings, and the potential for lower interest rates and fiscal policy stimulus. Following U.S. large cap was emerging market (EM) equities, gathering nearly $13 billion and $28 billion over the month and YTD periods, respectively. Despite being the sixth largest segment by assets ($401 billion) – slightly more than a tenth the size of the U.S. large cap equities – according to the MSCI EM Index, EM experienced a stellar 2025, up over 30%, and a strong 2026 thus far, up 15%, as investors continue to pour into the region. EM equities have benefited from the weaker USD, solid growth and robust manufacturing (notably in the AI buildout), and its relative discount to developed market equities from a valuation perspective.
What’s notable in equities is the amount of capital flowing into non-U.S. equities. As previously mentioned, emerging market equities received the second largest influx of capital over the month and YTD period, but what’s also significant is the money that’s moved into global ex-US total market and developed market ex-US equities, ranking third and fourth, respectively over the trailing one-month period. Despite a strong year from domestic stocks in 2025, with the S&P 500 up nearly 18%, most foreign equity markets were up 30% or more, as seen with the MSCI EM and MSCI EAFE indexes, and with investors most likely chasing performance.
At the other end of the spectrum are sector specific ETFs, such as financials, information technology, utilities, consumer discretionary, and leveraged equity: semiconductors – all ranking in the bottom 10 flows by segment YTD. Within information technology lies the software industry, which has sold off meaningfully as the threat of AI begins to weigh on market valuations. Semiconductors, also in the information technology sector, have held up better, up 1.4% on the year. The selling of some leveraged semiconductor ETFs could be the result of the broader sentiment towards AI as investors have grown weary the emerging technology will not live up to expectations.
Fixed Income
In fixed income, core bond categories such as U.S. broad market investment grade bonds, ultra-short Treasurys, and U.S. corporate investment grade bonds all ranked in the top 10 by segment in trailing one-month flows, ranking seventh, eighth, and tenth respectively. While bonds represent a smaller proportion of ETF markets (17% vs. equities at 78%), they continue to attract investor capital, closing the gap, albeit marginally, on their equity peers. Not all bond segments fared well though – global bank loans, which recently have been exposed to the drawdown in private credit markets on AI disruption fears – experienced some of the largest outflows in February, losing over $2.2 billion in assets.
Diversifying Strategies
Across diversifying strategies, as noted earlier, gold continues its strong run from 2025, ranking as the eighth largest segment YTD in terms of flows, gaining $10.6 billion in assets. Although gold is a much smaller segment of the broader ETF market (2.3%), it’s consistently ranked in the top 10 segments by monthly flows as investors look to diversify from traditional stocks and bonds.
Contrarily, while not a traditional fiat currency, digital assets have continued to see significant outflows as investors rotate away from highly speculative assets. The long BTC, short USD segment has realized the second and fourth most outflows over the trailing one month and YTD periods, respectively.
While small in size, alternatives broadly have seen positive flows, with downside protection ETFs, or sometimes referred to as “buffer” ETFs, becoming more popular amongst investors as they try to protect their portfolios from drawdown risk with heightened volatility. Additionally, traditional hedge fund strategies, such as global macro, event driven, and managed futures, which are now being offered in ETF vehicles (although with stringent restrictions to stay within regulatory compliance), continue to gain assets. Collectively, these alternative strategies can be seen as defensive positions that offer uncorrelated return streams to traditional equities and fixed income.
Foreign Equities, Core Fixed Income Dominate YTD Flows
Trailing YTD Net Asset Flows across Factset Segment (AUM, $ Billions)
Source: LPL Research, Factset, 2/27/26
Disclosures: Indexes are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results.
Key Tactical Asset Allocation Takeaways
When comparing the latest LPL Research Strategic and Tactical Asset Allocation Committee (STAAC) views with the February flows data, there are a number of similarities. The STAAC continues to like the top asset class by assets and YTD flows, U.S. large caps. The STAAC maintains an overweight to large/mid cap equities over small, with a tilt towards large/mid growth over small value. Large/mid growth equities continue to benefit from strong technology-driven earnings, helping justify lofty valuations; however, recent underperformance and negative technicals have led to a slightly more negative bias on the asset class. Regionally, the STAAC has been warming up to the second highest segment by flows YTD, emerging market equities, on improving fundamentals and technicals, but remain neutral from a geographic perspective between U.S, developed international, and emerging markets.
Within fixed income, the STAAC prefers core bond sectors over spread sectors as historically tight spreads make the relative risk-return profile of spread sectors less attractive. Outside of traditional stocks and bonds, the STAAC maintains an allocation to alternative investments, specifically in global macro and multi-strategy funds. From a sector perspective, the STAAC is overweight the communication services sector, which ranked in the middle by sector inflows YTD. The growth outlook in communication services remains solid and valuations are reasonable, although technical analysis conditions have softened leading to a negative bias on the sector.
The information presented is for educational and informational purposes only and is not intended as a recommendation or specific advice. Cryptocurrency and cryptocurrency-related products can be volatile, are highly speculative and involve significant risks including: liquidity, pricing, regulatory, cybersecurity risk, and loss of principal. A cryptocurrency fund may trade at a significant premium to Net Asset Value (NAV). Cryptocurrencies are not legal tender and are not government backed. Cryptocurrencies are non-traditional investments, resulting in a different tax treatment than currency. Federal, state or foreign governments may restrict the use and exchange of cryptocurrency. The use and exchange of cryptocurrency may also be restricted or halted permanently as regulatory developments continue, and regulations are subject to change at any time. Cryptocurrency exchanges may stop operating or permanently shut down due to fraud, technical glitches, hackers, malware, or bankruptcy.
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.
Not Insured by FDIC/NCUA or Any Other Government Agency | Not Bank/Credit Union Deposits or Obligations | Not Bank/Credit Union Guaranteed | May Lose Value
For Public Use – Tracking: #1072278
How LPL Research Thinks About Dividends
Dividend strategies, a.k.a. equity income strategies, have outperformed to start the year, owing to the value-led cyclical rotation we are seeing in domestic equity markets. Looking beyond current performance, this week, we ask and answer the question “How should I think about dividend stocks or building an equity income portfolio?”
Executive Summary
The idea of lying on the beach while your money works for you is often idealized in the financial media and by financial professionals alike. And why not? Investors love passive income, whether it comes from interest payments via fixed income securities, rental income from a real estate investment, or dividends from a stock portfolio. Our focus is on dividends, and understanding different approaches investors can incorporate into equity allocations. In this week’s Weekly Market Commentary, we analyze different equity income strategies, explain why we believe incorporating quality makes sense, and review technical charts to understand what’s potentially on the horizon for the near-term performance of different equity income strategies.
Key Takeaways
· Look Beyond Simple Dividend Yields. Our research shows that building a systematic dividend income strategy based solely on high dividend yields underperforms strategies based on total shareholder yield (dividend + buyback yield) or dividend growth.
· Pay Attention to Price-Based Returns. When analyzing equity income strategies, it is important to consider both sources of total return: current income and price-based returns (i.e., capital appreciation). Myopically focusing on total return ignores many real-world considerations like taxes, transaction costs, and current income requirements.
· Keep Quality Front of Mind. Given the susceptibility of high-dividend strategies to unknowingly fall into value- or yield-traps, we suggest “paying up” (i.e., accepting a slightly lower yield) to increase quality in any equity income portfolio, but especially in one focused solely on high dividend yields.
· What’s Working Today? Dividend-oriented equities remain in strong uptrends, supported by solid momentum and improving relative strength versus the broader market. The simple dividend yield strategy is currently leading on a short term basis, but longer-term relative trends favor continued outperformance from dividend growth and shareholder yield within the dividend stock landscape.
Equity Income: More Than Just Dividend Yields
For many investors, the desire for yield is a bedrock of their portfolio construction strategy. In this pursuit, dividend-paying stocks are often chosen for a portfolio’s equity allocation, providing a tangible cash return alongside the potential for capital appreciation. The starting point for most investors when building a portfolio of dividend paying stocks is the dividend yield. It is a straightforward, easily calculated figure that provides a framework for stock selection. Simply choose among the highest dividend yields to generate the highest level of income relative to capital invested. This dividend yield approach serves as a baseline strategy for comparison.
We propose an alternative framework for building or selecting an equity income portfolio, built around two enhanced strategies. The first is dividend growth, which shifts the focus from the level of the dividend today to the durability and consistent growth of the dividend over time. The second is shareholder yield, a more comprehensive metric that captures the total capital returned to shareholders by combining dividends with net share buybacks.
There is empirical evidence, by way of established third-party equity indexes, that enhanced equity income strategies such as these have generated compelling returns relative to simple high dividend yield strategies. Indexes that follow a shareholder yield index, such as the Morningstar U.S. Dividend and Buyback Index and those that follow a dividend growth index, like the S&P U.S. Dividend Growers Index have generated higher total return (inclusive of reinvested dividends) as well as higher capital appreciation (measured by cumulative price returns) than a basic high dividend yield index like the S&P 500 High Dividend Index.
Historical Total Returns Are Compelling for Enhanced Dividend Strategies
Disclosures: All indexes are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results.
Price-Based Returns Have Driven Dispersion Among Equity Income Strategies
Disclosures: All indexes are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results.
As we previously wrote (Exploring Equity Income: Mapping Key Approaches), the underperformance of high dividend payers have several possible explanations, with the simplest being that the high dividend payers are potentially allocating too much capital to cash dividends and not enough to reinvesting in the growth of the business. There are tradeoffs, however, as the high dividend yield index has a current yield that is 80% higher than the shareholder yield index, 2x higher than the dividend growth index, and 3.3x higher than the broad market (measured by the Russell 1000 Index).
Capital Appreciation Tradeoff: High-Dividend Strategies Provide Higher Current Income
Disclosures: All indexes are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results.
In the following sections, we will dig into the underlying structure of these approaches, including the economic rationale for each (the what), attempt to understand the drivers of historical performance (the what happened and why), and review of the current technical setups of the three indicative indexes to shed light on recent price trends (the what’s happening now).
A Framework for Analyzing Equity Income Strategies
We begin by defining our three core dividend strategies and their representative indexes: dividend yield (S&P 500 High Dividend Index), dividend growth (S&P U.S. Dividend Growers Index), and shareholder yield (Morningstar U.S. Dividend and Buyback Index). We will dive deeper into the economic rationale for why we believe the enhanced equity income strategies have outperformed historically, and then explain why we believe that integrating quality may improve any of the core equity income strategies.
The “Control” Strategy: Dividend Yield
The simplest approach, and our core “control” strategy, is dividend yield. This method of generating equity income starts and ends simply by screening a universe of stocks for the highest dividend yield and buying them. The appeal lies in its simplicity and its maximalist approach to generating current income.
However, this simple approach is fraught with hidden risks and flawed assumptions. First off, the strategy is agnostic to the sustainability of the dividend or the health of the underlying business. When a declining share price is driving a dividend yield higher, investors will need to understand whether the declining share price represents a temporary dislocation, or a structural impairment in the fundamentals of the business. Conversely, a high dividend payout ratio driving a stock’s dividend yield higher could prove unsustainable and lead to a dividend cut or suspension. The cumulative price-based performance of the dividend yield strategy relative to the enhanced equity income strategies highlights this risk and is representative of a key finding in our research, namely it suggests that the dividend yield strategy is a “capital treadmill”, i.e., its high dividend comes at the cost of a stagnant capital base.
The “GARP” Approach: Dividend Growth
The dividend growth strategy is a growth-ier approach to equity income, better suited for growth-oriented investors. This strategy prioritizes a company’s ability to consistently grow earnings and free cash flow, and therefore its ability to increase its dividend, rather than the level of its current dividend yield. The underlying assumption is that a steadily growing dividend is one of the strongest indicators of a healthy, high-quality business. Our belief is that a company must possess a durable competitive advantage, disciplined management, and confidence in its future earnings to commit to increasing its dividend year after year. Additionally, consistent dividend growth would seem to naturally filter out companies with volatile earnings or weak balance sheets. The resulting portfolio would therefore likely be composed of mature “cash cow” companies that are leaders in their respective industries, and thus exhibit not only higher exposure to growth factors but also quality factors such as profitability, earnings stability, and solvency.
Because the focus is on the growth of the dividend, the overall portfolio yield of the strategy is generally lower, but historical performance suggests that the potential capital appreciation is higher. Both insights show up in Price-based Returns Have Driven Dispersion Among Equity Income Strategies and Capital Appreciation Tradeoff: High Dividend Strategies Provide Higher Current Income. The upshot is this strategy may produce high “cost-based dividend yields” within the portfolio (using cost-basis, as opposed to current price, as the denominator in the dividend yield calculation). This approach is best characterized as a “Growth at a Reasonable Price” (i.e., “GARP”) strategy.
The “Quality Value” Approach: Shareholder Yield
A more holistic framework for identifying equities with attractive capital outlays to investors is shareholder yield. This strategy recognizes that dividends are but one method companies leverage to return capital to their owners (i.e., shareholders). Shareholder yield provides a more complete picture by combining two key components: dividends + share buybacks (net of share issuance, thus neutralizing dilutive policies such as share-based compensation). This approach captures the total capital returned to shareholders (what you get) relative to the market capitalization of the company (what you pay). Our belief is that this approach effectively screens for business quality in two ways:
- Given that boards and management teams generally consider dividends to be “fixed” and share repurchases to be “variable”, summing up the two may provide a better signal of the robustness of the free cash flow used to fund the distributions.
- Including share repurchases as well as dividend payouts potentially signals a flexible, shareholder-friendly management team that opportunistically increases share repurchases when shares are trading below management’s estimate of intrinsic value.
Note: Our naïve shareholder yield factor cannot accurately account for those potential opportunistic repurchases outlined in point number two. However, our research of two buyback factors (absolutely buyback level and buyback yield) suggests that incorporating yield (i.e., value) captures this phenomenon appropriately over the long term.
At a portfolio level, we would generally expect this approach to produce a slightly lower dividend yield than a simple dividend yield strategy, but a higher yield than the dividend growth strategy (or the market broadly). This expectation is confirmed by the current yields of the representative indexes. Given the above point on management teams propensity to leverage buybacks as the marginal source of shareholder return, we would expect a shareholder yield strategy to have higher free cash flow margins and less leverage, and thus possess a stronger quality profile.
Why We Believe Integrating Quality May Enhance Any Dividend Strategy
It is our belief, based on our factor strategy research, that over the long-term integrating quality factors such as high profitability, low earnings volatility, low leverage, and high ratios of cash earnings to accounting earnings can lead to better risk-adjusted returns. As previously discussed, it is also our belief that the shareholder yield and dividend growth strategies inherently screen higher-quality fundamentals compared to our baseline dividend yield strategy. Therefore, it stands to reason that integrating quality factors may produce better risk-adjusted outcomes for any equity income strategy. For the enhanced strategies, we surmise that increasing the already present quality exposure may result in a less volatile portfolio that generates higher risk-adjusted returns, with the likely tradeoff being lower current dividend yields. Where quality integration may help the most is the core dividend yield strategy.
We highlighted the inherent risks in the simple dividend yield strategy; that (a) a high yield due to a falling share price may signal weakness in the underlying fundamentals of the business or that (b) high dividend payout ratios may starve the business of necessary capital investment to maintain or grow cash-generating activities. Layering in a quality screen may reduce these risks, though at a likely reduction in current dividend yields (similar to the expected experience with the enhanced strategies).
There are multiple ways an investor can accomplish this. Bottoms-up fundamental research on each high dividend yielding stock is one. For the quantitatively inclined, integrated factor scores or factor quantile screens can also be leveraged. The former would entail standardizing the dividend yield factor and a quality composite factor and blending the standardized z-score, using a weighting scheme of your choice (we’d suggest an equal-weight 50/50 split). The latter would involve sequentially screening a universe for the top dividend yield quantile (such as a top 20% quintile, or a decile approach that screens for the 2nd and 3rd top deciles), and then screening it for the top quality factor quantile among that sub-population.
Current Technical Setup: Dividend Stocks Continue to Climb
- S&P 500 High Dividend Index (dividend yield): The index has seen a sharp acceleration over the past month as declining yields have boosted the relative attractiveness of dividend‑oriented stocks. Sector positioning has also been supportive, benefiting from a rotation toward value and away from mega‑cap tech and AI‑related disruption risks. (Real estate represents roughly 25% of the index and consumer staples about 18%.) From a technical perspective, the index is consolidating within a short‑term bullish flag pattern after breaking above resistance at the 2024 highs. A close above 9,445 would confirm a breakout and open the door to a target of 10,175 — approximately 9% above current levels. Relative performance versus the Equal Weight S&P 500 Index has improved notably in recent months, though it remains below a longer‑term downtrend. A sustained move above the August 2025 highs on the ratio chart would signal a new uptrend and point to more durable outperformance ahead.
- S&P 500 U.S. Dividend Growers Index (dividend growth): The index has climbed steadily above a consistent uptrend that has been in place since April 2025. Realized volatility has been exceptionally low, with the index registering a maximum drawdown over this period of only around 3%. Momentum indicators remain bullish, but not overbought, and point to further upside potential. On a relative basis, the S&P 500 U.S. Dividend Growers Index has broken out of a bottom versus the S&P 500, pointing to further runway for outperformance.
- Morningstar U.S. Dividend and Buyback Index (shareholder yield): The index has continued to set new record highs after breaking out from a year‑long base last fall. Recent overbought conditions have normalized as prices pulled back to test uptrend support. Participation has been robust, with 75% of constituents now trading above their 200‑day moving average, a 25% improvement since November. Based on the prior consolidation range, a minimum technical upside objective sets up near 5,400, implying roughly 12% of potential upside from current levels. On a relative basis, the Morningstar U.S. Dividend and Buyback Index has reversed its downtrend versus the Morningstar U.S. Market Index and is now at multi‑month highs, indicating further potential for outperformance.
Dividend Stocks Continue to Climb
Source: LPL Research, Bloomberg, 02/26/26
Disclosures: All indexes are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results. Estimates may not materialize as predicted and are subject to change.
Conclusion
Our analysis of equity income strategies suggests there is value in a multi‑faceted approach that looks beyond dividend yields. The insights gleaned from this analysis apply to building rules-based screens or systematic “quant” strategies as well as supporting discretionary “quanta‑mental” investment processes, where factor insights inform, but do not replace fundamental judgment. Technical analysis suggests recent outperformance of the basic high dividend strategy may be fleeting and that both of the enhanced equity income strategies show better relative strength.
Looking ahead, the historical results make clear that simple dividend screens may not be adequate for today’s market environment. As capital allocation practices evolve and corporate balance sheets continue to diverge in quality, the opportunity set for equity income investors will increasingly support looking to approaches that go beyond headline dividend yields. A continued shift toward strategies that balance income with capital appreciation (dividend growth), total shareholder return (shareholder yield), and balance‑sheet strength (quality integration) will be essential for generating more resilient outcomes over time.
Adam Turnquist, Chief Technical Strategist, LPL Financial
Tom Shipp, Head of Equity Research, LPL Financial
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 or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
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. LPL Financial doesn’t provide research on individual equities.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
All investing involves risk, including possible loss of principal.
US Treasuries may be considered “safe haven” investments but do carry some degree of risk including interest rate, credit, and market risk. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
The Standard & Poor’s 500 Index (S&P500) is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The PE ratio (price-to-earnings ratio) is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share. It is a financial ratio used for valuation: a higher PE ratio means that investors are paying more for each unit of net income, so the stock is more expensive compared to one with lower PE ratio.
Earnings per share (EPS) is the portion of a company’s profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company’s profitability. Earnings per share is generally considered to be the single most important variable in determining a share’s price. It is also a major component used to calculate the price-to-earnings valuation ratio.
Precious metal investing involves greater fluctuation and potential for losses.
The fast price swings in commodities will result in significant volatility in an investor’s holdings. Commodities include increased risks, such as political, economic, and currency instability, and may not be suitable for all investors.
The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index. Indexes are unmanaged and cannot be invested in directly.
The MSCI US Broad Market Index captures broad U.S. equity coverage. The index includes 3,204 constituents across large, mid, small and micro capitalizations, about 99% of the U.S. equity universe. Indexes are unmanaged and cannot be invested in directly.
All index data from FactSet or Bloomberg.
This research material has been prepared by LPL Financial LLC.
| Not Insured by FDIC/NCUA or Any Other Government Agency | Not Bank/Credit Union Guaranteed | Not Bank/Credit Union Deposits or Obligations | May Lose Value |
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Assessing the Impact of Developments in Iran: Watch Energy
Last Updated:
Over the weekend, the United States and Israel conducted a coordinated series of missile and drone strikes against Iran, targeting several high-value military installations in an effort to hinder Iran’s nuclear development efforts. These operations resulted in the death of Iran’s Supreme Leader, Ayatollah Ali Khamenei, marking a significant escalation and immediately heightening regional tensions. Iran quickly retaliated by launching a broad series of missile attacks directed not only at Israel but also at multiple Gulf states, including Qatar, the United Arab Emirates, and Bahrain. The repercussions were felt across the region. Several Gulf countries responded by shutting down their airspace and closing their equity markets. The conflict also affected global energy flows. Tanker traffic through the Strait of Hormuz, a vital waterway that carries about 20% of the world’s oil supply, came to a near standstill as shipping companies diverted vessels away from the area for safety reasons. Plus, Qatar shuttered liquefied natural gas production at the world’s largest export facility after being targeted by an Iranian drone strike. President Donald Trump stated that U.S. strikes on Iran would continue, signaling that tensions are likely to remain elevated for the next few weeks.
From a market perspective, the energy market is the primary way through which this crisis is likely to impact global markets. Any sustained disruption to oil or natural gas flows, especially if both severe and long lasting, have the potential to influence inflation expectations, weigh on business confidence, and elevate volatility across asset classes. In simple terms, the more intense and prolonged the geopolitical shock, the larger the likely market impact.
This pattern was already evident when markets opened on Monday. Brent crude, the global benchmark for oil prices, briefly touched $82 per barrel as traders responded to the possibility of tighter supply conditions. A sustained period of elevated prices would place upward pressure on inflation expectations, and that in turn could have broader consequences for both equity and interest rate markets. However, for such a persistent rise in crude prices to materialize, markets would likely need evidence of a more prolonged or even total shutdown of the Strait of Hormuz. A disruption of that scale would represent a meaningful escalation relative to what has occurred so far and would justify a more substantial risk premium in energy markets. There is also a political dimension tied to Iran’s internal stability, particularly regarding how the Islamic Revolutionary Guard Corps (IRGC) chooses to respond. Whether it opts to pull back or escalate further will play a major role in determining how much of the current shock reflects elevated risk premiums versus a true disruption to physical supply.
Oil Prices Spike as Strait of Hormuz Tanker Traffic Stalls
Source: LPL Research, Bloomberg 03/02/26
Disclosures: Past performance is no guarantee of future results.
Given how rapidly the situation continues to evolve, closely following movements in energy prices remains one of the most effective ways to assess the level and durability of the underlying geopolitical risk. Oil and natural gas markets tend to adjust quickly to new information, which means they can serve as a real-time barometer of whether tensions are beginning to ease, stabilize, or intensify. Monitoring these markets will therefore be essential for understanding how the conflict may continue to influence global market conditions in the days and weeks ahead.
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.
Not Insured by FDIC/NCUA or Any Other Government Agency | Not Bank/Credit Union Deposits or Obligations | Not Bank/Credit Union Guaranteed | May Lose Value
For Public Use – Tracking: #1072327
Weekly Market Performance — February 27, 2026
LPL Research provides its Weekly Market Performance for the week of February 23, 2026. U.S. stocks fell for the week as concerns about AI’s disruptive impact drove a broader risk‑off shift. Technology and banks weakened, while defensive sectors held up better. International markets were mixed, with Asia outperforming despite global caution around AI. In bonds, falling yields supported core fixed income as investors grew more worried about economic momentum. Commodities strengthened on rising geopolitical tensions and dampened risk appetite, while the U.S. dollar edged slightly lower.
Stock Index Performance
| Index | Week-Ending | One Month | Year to Date |
| S&P 500 | -0.81% | -1.79% | 0.12% |
| Dow Jones Industrial | -1.62% | -0.37% | 1.58% |
| Nasdaq Composite | -1.23% | -5.09% | -2.75% |
| Russell 2000 | -1.65% | -1.75% | 5.56% |
| MSCI EAFE | 0.50% | 3.27% | 9.78% |
| MSCI EM | 0.15% | 3.47% | 14.12% |
S&P 500 Index Sectors
| Sector | Week-Ending | One Month | Year to Date |
| Materials | 0.89% | 6.23% | 17.21% |
| Utilities | 2.53% | 9.09% | 10.93% |
| Industrials | -0.71% | 6.52% | 13.34% |
| Consumer Staples | 2.59% | 8.31% | 15.84% |
| Real Estate | 0.68% | 6.82% | 9.12% |
| Health Care | 1.68% | 2.46% | 2.76% |
| Financials | -2.43% | -3.53% | -6.79% |
| Consumer Discretionary | -0.97% | -7.18% | -4.29% |
| Information Technology | -2.15% | -6.43% | -5.59% |
| Communication Services | -0.58% | -3.55% | -0.81% |
| Energy | 1.64% | 11.44% | 23.96% |
Fixed Income and Commodities
| Indexes and Commodities | Week-Ending | One Month | Year to Date |
| Bloomberg US Aggregate | 0.31% | 1.36% | 1.52% |
| Bloomberg Credit | 0.10% | 1.09% | 1.36% |
| Bloomberg Munis | 0.22% | 1.31% | 2.08% |
| Bloomberg High Yield | -0.09% | 0.13% | 0.83% |
| Oil | 0.81% | 7.28% | 16.56% |
| Natural Gas | -6.47% | -59.02% | -22.68% |
| Gold | 2.77% | 1.32% | 21.51% |
| Silver | 10.15% | -16.82% | 30.10% |
Source: LPL Research, Bloomberg 2/27/26 @2:30 p.m. ET
Disclosures: Indexes are unmanaged and cannot be invested in directly.
U.S. and International Equities
U.S. Equities: The S&P 500 ended lower on the week because of Friday’s decline after entering today’s session unchanged week to date. Friday’s decline secured a down February for the S&P 500 and the Nasdaq, although the Dow Industrials ended the month little changed. Market participants remained focused on the potential downside of AI in terms of disruption to various business models, most notably — but not exclusively — software. Fears of job losses related to AI, along with renewed — and related — concerns about potential losses in the private equity and credit markets were simply too much for the market to withstand. The major averages rolled over on Friday, led lower by banks and technology. The rally in Treasuries came despite a hot wholesale inflation report, providing evidence of the market’s economic growth concerns.
It didn’t help market sentiment in the technology sector that strong results from NVIDIA (NVDA) on Wednesday were greeted with heavy selling pressure after an initial move higher in after-market trading. Dip buying in beaten-down software names early in the week proved fleeting. Markets continued to exhibit dispersion, with defensive sectors including utilities, consumer staples, and healthcare each producing solid gains for the week. Energy also delivered solid gains as crude oil prices rose in anticipation of a potential U.S. military strike in Iran.
International Equities: AI fears that weighed on U.S. markets spilled over some into international markets this week as the developed international and emerging market (EM) stock indexes were only able to muster modest gains for the week despite the tailwind from the rotation out of U.S. technology stocks. The STOXX 600 secured its ninth straight positive month, but the best markets were in Asia, including Japan, Korea, and Taiwan, with the latter two countries getting a boost from strong demand for chips and memory given their exposure to the AI buildout. The U.S. dollar was relatively stable on the week and had little impact on non-U.S. returns.
Fixed Income, Currency, and Commodity Markets
Fixed Income: Despite modest credit spread widening during the week, core bonds, measured by the Bloomberg Aggregate Index, traded higher due to the continued rally out of the Treasury market. From the recent peak of 4.293% earlier this year, the 10‑year yield has fallen by roughly 30 basis points — the bulk of the move occurring in February. The decline in yields has coincided with AI‑driven displacement concerns weighing on equity and credit markets. Despite generally resilient economic data, which has continued to surprise to the upside (per the Bloomberg Economic Surprise Index), the drop in yields aligns with softening economic growth expectations.
Nominal Treasury yields reflect both inflation and growth expectations. Of the roughly 30 basis point decline, 25 basis points can be attributed to weaker economic growth expectations. The risk‑off tone has boosted Treasuries, with the Bloomberg Treasury Index up more than 1.5% month‑to‑date — making it the best‑performing major fixed income sector and reaffirming Treasuries’ role as a safe‑haven asset. Interestingly, the rally in rates was met with muted demand at this week’s 2‑year and 5‑year auctions (though Thursday’s 7‑year auction was solid), suggesting investors may view the rally as stretched at this point. With the 10‑year yield still within our fair‑value range of 3.75%–4.25%, we do not view this as an attractive point to chase the move. We remain neutral duration relative to benchmarks.
Commodities and Currencies: The broader commodity complex strengthened this week, highlighted by strong performance in precious metals. Silver led the advance with a 5.6% gain, while gold rose 1.3% and broke through resistance near its mid‑February highs. Safe‑haven buying intensified amid escalating U.S.–Iran tensions, uncertainty surrounding U.S. tariff policy, and a general pullback in equity markets. Oil prices also moved higher, with West Texas Intermediate (WTI) crude climbing nearly 1%. Concerns over a potential strike on Iran increased following the evacuation of non‑emergency U.S. embassy personnel in Israel. Adding to the anxiety, President Trump stated on Friday that he is “not happy” with Iran or the progress of negotiations over its nuclear program. At the same time, expectations grew that OPEC+ may announce higher production levels in April. The U.S. dollar eased modestly, pressured by declining interest rates and trade policy uncertainty, partially offsetting the impact of Friday’s hotter‑than‑expected wholesale inflation reading.
Economic Weekly Roundup
Consumer confidence rebounded as more consumers view a better employment situation, but the index is still significantly lower than the near-term high of late 2024.
- Consumers reported the most plentiful employment opportunities since November. The job market outlook for the next six months also improved in February. Good news for the consumer outlook.
- Spending plans on restaurants and travel were higher so far this year, supporting the discretionary sector outlook.
- The broader trend over the past 14 months is downward, as consumers are feeling pessimistic about geopolitical tensions and trade uncertainty.
Despite the rebound, the trend is still negative. The report revealed job market conditions are holding steady, one of the necessary conditions for the Federal Reserve (Fed) as they will likely hold rates steady for the next few meetings. The balance of risks tilt toward inflation, according to Fed officials. Inflation is likely to run hotter in the near term, consistent with the ISM prices paid signal and Friday’s wholesale inflation data, but by December, core PCE should be close to 2.2%.
The Week Ahead
The following economic data is slated for the week ahead:
- Monday: S&P Global U.S. Manufacturing PMI (Feb final), ISM Manufacturing report (Feb)
- Tuesday: Wards Total Vehicle Sales (Feb)
- Wednesday: MBA Mortgage Applications (Feb 27), ADP Employment Change (Feb), S&P Global U.S. Services and Composite PMIs (Feb final), ISM Services Index (Feb)
- Thursday: Challenger Job Cuts (Feb), Import and Export Price Indexes (Jan), Nonfarm Productivity (Q4 preliminary), Unit Labor Costs (Q4 preliminary), Initial Jobless Claims (Feb 28), Continuing Claims (Feb 21)
- Friday: Retail Sales (Jan), Change in Nonfarm, Private, and Manufacturing Payrolls (Feb), Average Hourly Earnings (Feb), Average Weekly Hours All Employees (Feb), Unemployment Rate (Feb), Labor Force Participation Rate (Feb), Underemployment Rate (Feb), Business Inventories (Dec), Consumer Credit (Jan)
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.
Not Insured by FDIC/NCUA or Any Other Government Agency | Not Bank/Credit Union Deposits or Obligations | Not Bank/Credit Union Guaranteed | May Lose Value
For Public Use – Tracking: #1071815
Continuation Funds: What They Are and Why They Matter
With traditional private equity investment exits facing difficulty over the past few years — albeit improving somewhat recently — private equity sponsors have increasingly relied on the use of continuation funds. Once a niche tool, continuation funds have become mainstream and investors should learn to understand how they work, why they exist, and what risks they carry.
What Is a Continuation Fund?
A continuation fund is a new vehicle created by a private equity manager to hold onto one or more portfolio companies beyond the typical ~10 years of an original fund. Rather than selling an asset outright at the end of a fund’s life, the general partner (GP) transfers the underlying investment into a new, separate fund. This provides existing limited partners (LPs) with a choice — either cash out now or roll their existing investment into the new vehicle and maintain exposure to the existing portfolio company. New investors, often large secondary market buyers, come in to provide liquidity for those who do not wish to invest in the continuation fund. The GP is assuming that the company still has meaningful upside and that additional time will produce a more attractive outcome.
Why Do Managers Use Them?
The appeal for general partners is straightforward. Selling a high-conviction portfolio company in a weak market can reduce or leave additional value on the table. Continuation funds allow managers to maintain ownership, avoid a fire sale, and/or keep collecting management fees. For the GP, it also means retaining a flagship asset that supports their track record and next fundraise. For LPs who roll over, they maintain exposure to a company they are already familiar with. For those who want out, the structure offers liquidity without waiting for an uncertain initial public offering (IPO) or sale.
Impact on Public Markets
Continuation funds have a meaningful indirect effect on public equity markets. By allowing GPs to defer exits, they reduce the pipeline of IPOs that would otherwise enter public markets. When large, mature private companies stay private longer, they end up representing a growing part of the economy that public market investors cannot access.
This dynamic has contributed to the well-documented decline in the number of public equity firms. Fewer companies going public means less opportunity for traditional fund managers. It also means that some of the most compelling growth stories play out entirely in private ownership, with public market participants left holding the slower-growth, post-peak version of a company if and when it finally lists.
Controversies and Conflicts of Interest
With this growth, there has also been significant criticism. The main problem is a conflict of interest inherent to the structure itself. The GP simultaneously represents the seller (the original fund), the buyer (the new continuation vehicle), and sets the valuation at which the transfer occurs. Critics argue that GPs are incentivized to only choose their best assets for continuation funds, in turn, leaving weaker companies in the original fund to wind down.
Key Risks for Investors
For LPs considering rolling into a continuation fund, several risks deserve attention. Valuation opacity remains the central challenge, as private assets are difficult to price independently, and the GP’s mark may not reflect what an arm’s-length buyer would pay. There is also concentration risk, as continuation funds are often single-asset or two-asset vehicles, meaning there is no portfolio diversification to cushion against a bad outcome. Liquidity extension is another concern. Rolling over means recommitting capital for an uncertain additional period, often another three to five years, with no guarantee of an exit at the end. And fee structures can reset, meaning investors who roll may find themselves paying full management fees again on assets they have already held for a decade.
LPL Research Takeaway
Continuation funds are neither inherently good nor bad, rather, they are a tool whose value depends on their proper use. When deployed to preserve genuine value in a difficult exit environment, they may serve investors well. When used to extend GP fee income or obscure underperformance, they do not. As an investor, the right question to ask is not whether a continuation fund exists, but why and whether the GP’s interests truly align with yours.
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.
Not Insured by FDIC/NCUA or Any Other Government Agency | Not Bank/Credit Union Deposits or Obligations | Not Bank/Credit Union Guaranteed | May Lose Value
For Public Use – Tracking: #1070629
Competitors to the Greenback Are Less Significant
Dr. Jeffrey Roach | Chief Economist
Hypothetical Scenario
Let’s develop a scenario to explain the importance of foreign exchange (FX) markets and specifically, the dominance of the U.S. dollar. Say, for example, Thailand, one of the world’s major rice exporters, engages in trade with Brazil, the second‑largest cotton exporter. When these two countries conduct bilateral trade, they typically do not settle transactions directly in Thai baht or Brazilian real. Instead, they frequently convert their home currencies into U.S. dollars, the dominant invoicing and settlement currency in global trade and FX markets. Because the U.S. dollar is one of the most liquid and widely accepted intermediaries for cross‑border payments, it is the de facto choice for this hypothetical Thai-Brazilian trade settlement.
Dominance of the Dollar
The previous scenario explains why the dollar has maintained such dominance in global trade. One of the most convincing stats for the dollar’s reserve currency status is the fact that the U.S. dollar is in roughly 90% of all global FX transactions. And that hasn’t materially changed for over two decades. But in contrast, in recent years, the euro was in roughly 30% of FX transactions, down from roughly 40% in 2010[1].
Network effects help explain why the U.S. dollar maintains its dominant role as the world’s primary reserve currency. Because so many countries, financial institutions, and global markets already use the dollar for trade, investment, and reserve holdings, its value and convenience increase as more participants rely on it. This broad adoption creates a self‑reinforcing cycle: central banks continue to hold dollars because many global transactions are dollar‑denominated, and global transactions remain dollar‑denominated because central banks continue to hold dollars. Because so many are already using the dominant product, switching becomes difficult, and competitors struggle to gain traction.
In addition to the vast majority of all FX transactions, the dollar makes up a sizable share of foreign exchange reserves. The International Monetary Fund’s Currency Composition of Official Foreign Exchange Reserves (COFER) data underscore this dynamic, showing that the U.S. dollar represents the largest share of global foreign exchange reserves. For example, it accounted for roughly 57% of world reserves in the latter half of 2025.
U.S. Dollar Has the Largest Share of Global Foreign Exchange Reserves
Source: LPL Research, International Monetary Fund 02/25/26
But Not Without Competitors
Such persistent scale and liquidity make it difficult for alternative currencies to displace the dollar, illustrating how network effects entrench incumbency in the international monetary system.
The BRICS nations (Brazil, Russia, India, China, and South Africa, along with newly expanded members) have worked to create a network for cross‑border transactions in national currencies without relying on Western‑dominated systems like SWIFT or reserve currencies such as the U.S. dollar but have run into challenges getting other trading partners to align[2]. Nations unhappy with dollar dominance will continue to iterate on ways to displace the dollar so threats will continue. But as the Fed paper explains, the dollar is deeply embedded in global finance and will likely remain dominant “for the foreseeable future.”
Conclusion
Trading tensions could create fodder for countries to coalesce around non-dollar denominated trading. Political firestorms, such as a politicized Federal Reserve, also create stresses in cross-border payments. Over the longer term, several developments could gradually increase the appeal of alternative currencies. Geopolitical concerns have prompted discussion about diversification, but the dollar’s reserve share has not meaningfully declined, partly because most other major reserve currencies are issued by U.S. allies. Greater European fiscal integration and the expansion of jointly issued EU bonds could strengthen the euro’s role, though political fragmentation remains a limiting factor. China’s economic size continues to grow, yet the renminbi’s international prospects are constrained by capital controls, limited convertibility, and weak investor confidence. Technological shifts, including digital currencies and stablecoins, could either weaken or reinforce the dollar, especially since most stablecoins are already dollar‑linked. Overall, absent severe disruptions to dollar stability combined with major improvements in competing currencies, the dollar is likely to remain the world’s dominant reserve currency for the foreseeable future.
[1] See Fig. 11, The Fed – The International Role of the U.S. Dollar – 2025 Edition “Because one currency is purchased and another currency is sold in FX transactions, each trade is counted twice, so the sum of the FX transactions measure is 200 percent.”
[2] The BIS announced in October 2024 that it was handing the project over to the partners. Project mBridge reached minimum viable product stage
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.
Not Insured by FDIC/NCUA or Any Other Government Agency | Not Bank/Credit Union Deposits or Obligations | Not Bank/Credit Union Guaranteed | May Lose Value
For Public Use – Tracking: #1070107
When Mega Caps Waver and Small Caps Surge
Kristian Kerr | Head of Macro Strategy
Every market cycle has its own character, but certain patterns appear frequently enough that they deserve attention. This is especially true when evaluating early-year rallies in small caps. Market history offers several notable examples of small caps surging right at the start of the year, and these bursts of strength have often provided insight into where we stand in the broader cycle.
One example comes from January 1972, during the rise of the “Nifty Fifty”, when small caps rose more than 10% in a single month and finished the first quarter up nearly 19%. Another example occurred in January and February 2000, a period when small caps posted a strong advance right out of the gates even as the overall market had become dominated by large cap technology names. In both cases, the early surge did not mark the beginning of a new small cap cycle. Instead, it represented a temporary spark within an already mature bull market.
When markets reach high levels of concentration, as they have today, it is not uncommon to see short-lived phases where small caps and other lagging market segments finally attract interest. However, history suggests that sustained broadening after periods of elevated concentration usually does not take hold until after the market has moved through a phase of meaningful volatility. The 1972 episode illustrates this well. By the end of that year, small caps had surrendered most of their first quarter gains and ended the year with a return of less than 5%. They then declined broadly during the severe 1973–1974 bear market before eventually emerging as market leaders and embarking on one of the strongest periods of small cap outperformance ever witnessed over the next five years.
We do not want to understate the importance of the strength we have seen in small caps this year. Broadening can obviously be a healthy development for the market. Even so, it is also essential to consider context. Sharp early year rallies in small caps during periods of elevated index concentration tend to occur when the cycle is already well advanced and when the market is wrestling with its own internal imbalances.
With the Magnificent Seven pulling back into a major area of support last week, as highlighted in the “Magnificent Seven Attempting to Hold Major Support Level” chart, the market now appears to be at an important inflection point. How prices behave over the next several weeks could provide meaningful insight into the market’s true condition and the likely direction of leadership. If the megacaps are going to re-establish themselves as the dominant drivers of performance again, this is the type of technical and seasonal backdrop in which such a transition would be expected to emerge. However, if that leadership does not reassert itself here, it will be a strong sign that the character of the market is indeed undergoing a more important shift, which could bring with it a higher degree of overall market volatility.
Magnificent Seven Attempting to Hold Major Support Level
Source: LPL Research, Bloomberg 02/23/26
Disclosures: All indexes are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results.
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.
Not Insured by FDIC/NCUA or Any Other Government Agency | Not Bank/Credit Union Deposits or Obligations | Not Bank/Credit Union Guaranteed | May Lose Value
Tracking: #1068958
LPL Research’s 2026 Strategic Asset Allocation
Last Edited by:
LPL Research
Last Updated: February 23, 2026
LPL Research’s Strategic Asset Allocation (SAA) sits at the center of our portfolio construction process because it defines how we expect diversified portfolios to generate more stable long‑term outcomes across shifting market environments. The SAA is the long‑term plan for how major asset classes work together in a portfolio. It sets target weights for stocks, bonds, and diversifiers over a three-to-five-year horizon with the goal of improving risk‑adjusted returns through balance, valuation discipline, and purposeful diversification. We review it annually to reflect meaningful shifts in long‑run drivers like growth, inflation, interest rates, and asset class characteristics. The 2026 update seeks steady compounding by rightsizing equity risk, anchoring in high‑quality fixed income, and preserving sleeves in real assets and select alternatives so portfolios remain resilient across a range of outcomes. In this edition of the Weekly Market Commentary, we highlight some key elements of the 2026 SAA update.
#1: What is Changing in the 2026 SAA?
Our Strategic Asset Allocation is the long‑horizon blueprint that guides portfolios across market cycles. For 2026, we maintain a modest, but slightly reduced, underweight to total equity risk, reduced domestic small caps, increased exposure to developed international and U.S. large value equities, and maintain a purposeful allocation to real assets and select alternative investments. Core high‑quality fixed income remains the anchor. We are measured with longer-duration Treasuries given less stable correlations, which supports a more balanced risk posture at a time when the compensation for taking equity risk is fair but not abundant.
Stock Valuations Are Fair Relative to Bonds, So the Equity Risk Premium Offers Limited Compensation
Valuations suggest sizing equity risk for balance rather than bravado
Source: LPL Research, Bloomberg 12/31/25
Disclosures: All indexes are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results.
#2: The Strategy Behind the Strategy
Each year LPL Research updates its Capital Market Assumptions (CMA). These long‑term return, volatility, and correlation assumptions underpin the SAA and serve as the bridge between our multi-year macro outlook and the strategic portfolio weights. The CMA translates outlooks on growth, inflation, and valuations into the disciplined set of portfolio weights in the SAA. We revisit the CMA and SAA annually because long‑term drivers and asset characteristics do evolve, even when our horizon is three to five years.
Over this time horizon, the SAA is built to be durable, not delicate. We blend multiple independent signals in a Black‑Litterman1 framework and validate model outputs against the LPL Research Strategic and Tactical Asset Allocation Committee’s (STAAC) outlook before finalizing weights. This process helps ensure no single viewpoint dominates the allocation and that portfolios reflect a balanced and diversified set of long‑term drivers.
The aim is that each building block must either improve expected returns or reduce expected risk versus our diversified benchmarks. LPL Research evaluates asset classes for sensitivity to many factors, which may influence the expected returns of equities, fixed income, diversifying strategies, and cash over a strategic investment horizon, including economic growth, inflation, interest rates, business cycle, valuations, fundamentals, geopolitical risk, volatility, and dispersion. Higher cross‑asset dispersion increases the value of strategies that can respond to divergent trends
Valuations play a particularly critical role in our strategic framework, as historically they have demonstrated a high correlation with long-term market performance. The price-to-earnings ratio (P/E) for the S&P 500 Index, for example, has shown predictive power for subsequent decade-long returns, with higher P/Es typically preceding weaker long-term performance and lower P/Es often followed by stronger results. This relationship between starting valuations and subsequent returns supports patience and informs how we size risk exposure and tilt across styles within the SAA context.
1 This approach “allows us to generate optimal portfolios that start at a set of neutral weights and then tilt in the direction of the investor’s views”. Black, Fischer, and Robert Litterman. “Global Portfolio Optimization.” Financial Analysts Journal 48, no. 5 (1992): 28–43. www.jstor.org/stable/4479577
Stock Valuations Have Been Good Predictors of Long‑Term Returns
Starting points matter. Valuation discipline is why strategically we emphasize patience over prediction
Source: LPL Research, FactSet 01/31/26 (Data from 1991 to present)
Disclosures: All indexes are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results.
#3: Equity Positioning for this Cycle
Within the 2026 SAA, we retain meaningful equity exposure but keep it modestly below benchmark exposure levels. We increase U.S. large-value and developed international equities where starting valuations, income, and stability characteristics strengthen the long‑run strategic investment case. We trim small cap equities to balance return potential with volatility, acknowledging a tighter risk-reward today, but we still believe in their role over full market cycles and keep a material overweight relative to a purely global market cap baseline. Reducing small caps modestly allows the portfolio to benefit from their long‑term potential while avoiding excess volatility during periods when quality and income characteristics in larger‑cap markets seem more compelling. The result in this vintage of the SAA is a steadier mix of equities that relies less on a narrow set of increasingly concentrated outcomes and more on diversified drivers of return.
The strategic lens through which we view the SAA is intentionally insulated from week‑to‑week, and especially day-to-day, narratives. Even as headlines swing (sometimes intra-day) from AI enthusiasm to disruption worries, the SAA stays anchored in valuations, cash flow durability, and cross‑asset relationships that matter over multiple years. This helps prevent short‑term sentiment swings from pulling long‑horizon portfolios off course. We believe that recognizing and aligning the likely time horizon of investment drivers and the desired model investment time horizon, strategic or tactical, is a cornerstone of effective portfolio management. Sometimes our strategic and tactical views diverge due to the difference of emphasis that each place on valuations, fundamentals, and technicals.
#4: Fixed Income: Diversification, Liquidity, and Income
The bond sleeve does three jobs for strategic investors — it provides income, it supplies liquidity, and through diversification it offers ballast when risk assets stumble. We emphasize high‑quality core taxable bonds, and, for tax‑aware investors, investment‑grade municipals can stand in for the core sleeve where appropriate. We keep duration (interest-rate sensitivity) from dominating the defense and let the core sleeve do what it does best and provide risk mitigation in ordinary financial market corrections, something that longer-duration fixed income may not do. Recent years have shown that stocks and longer‑duration bonds can sell off together, which is why we avoid overly relying on duration for downside risk mitigation. As such, our strategic stance recognizes a range of inflation outcomes and less stable stock‑bond correlations. We maintain a measured stance on long nominal Treasuries and prefer short‑duration Treasury Inflation- Protected Securities (TIPS) as a tool for hedging upside inflation surprises over a three-to-five-year horizon. While spreads remain tight, we are also careful about reaching for yield in non‑core segments of fixed income markets (unless above benchmark yield is a specific portfolio goal).
#5: Diversifiers That Earn Their Keep
Diversification is intentional, not ornamental. We maintain exposure to real assets and a focused lineup of alternative investments because each brings a distinct job to the portfolio. Real assets, including commodities and global listed infrastructure, help address inflation and provide different growth sensitivities. Their role is especially important in an environment where inflation has moderated but remains influenced by structural forces. Alternative investments, such as multi‑strategy, global macro, and managed futures, can reduce volatility, help during periods of trend divergence, and mitigate concentration risk. We hold these asset classes because they either improve expected returns or reduce expected risk, not because they are fashionable.
The Growth with Income (GWI) balanced 60/40‑style investment objective of the SAA shows how equities, quality bonds, and diversifiers share the work from a portfolio perspective. This core portfolio highlights how equity exposure drives long‑term return potential, how core fixed income provides income and stability, and how real assets and alternatives help manage inflation and volatility so the mix can compound more steadily over a full market cycle. These diversifiers play an important role when traditional stock‑bond relationships behave unusually, offering additional pathways for portfolios to navigate shifting macro conditions.
LPL Research Strategic Asset Allocation, Growth with Income (GWI) 60/40
Within GWI, equities, quality bonds, and purposeful diversifiers each contribute to balance
Source: LPL Research, FactSet 02/23/26
Disclosures: Core Strategic Asset Allocations are designed to seek capital growth and income generation by employing a strategic approach that adapts to evolving capital market assumptions. The objective is to provide a total return in excess of the benchmark. LPL shows performance as compared to the Diversified benchmark. The benchmark is created by allocating a portion of the benchmark to stocks, bonds and cash indices in varying proportions according to a model’s risk profile.
Conclusion
LPL Research’s 2026 SAA update steers investors to maintain a modest underweight to equity risk, tilting exposures to large cap value and international equities, and continuing to allocate to a dedicated exposure to a diversifying basket of real assets and alternative investments.
Strategic allocation is about robustness over extended periods, not precision over short ones. Through our combination of qualitative insight and quantitative discipline, we build allocations for a range of outcomes, validate the inputs each year, and let time, income, and disciplined rebalancing do the heavy lifting. That is how the SAA aims to compound steadily over the next three to five years.
LPL clients can speak to their financial advisor about implementing these insights through LPL Research’s strategic models that are available on our managed account platforms, including Model Wealth Portfolios (MWP). These platforms offer flexibility to emphasize LPL Research’s strategic views while also tailoring accounts to individual investment objectives and risk tolerances.
George Smith, Portfolio Strategist, LPL Financial
Craig Brown, Head of Quant Research, LPL Financial
You may also be interested in:
- From Bubble Fears to Disruption Risk: The New AI Market Narrative — February 17, 2026
- Five Reasons the Run in Emerging Markets Could Continue — February 9, 2026
- Dueling Mandates: The Fed’s Policy Caution and Treasury’s Growing Borrowing Needs — February 2, 2026
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 or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
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. LPL Financial doesn’t provide research on individual equities.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
All investing involves risk, including possible loss of principal.
US Treasuries may be considered “safe haven” investments but do carry some degree of risk including interest rate, credit, and market risk. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates riseand bonds are subject to availability and change in price.
The Standard & Poor’s 500 Index (S&P500) is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The PE ratio (price-to-earnings ratio) is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share. It is a financial ratio used for valuation: a higher PE ratio means that investors are paying more for each unit of net income, so the stock is more expensive compared to one with lower PE ratio.
Earnings per share (EPS) is the portion of a company’s profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company’s profitability. Earnings per share is generally considered to be the single most important variable in determining a share’s price. It is also a major component used to calculate the price-to-earnings valuation ratio.
Precious metal investing involves greater fluctuation and potential for losses.
The fast price swings in commodities will result in significant volatility in an investor’s holdings. Commodities include increased risks, such as political, economic, and currency instability, and may not be suitable for all investors.
The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index. Indexes are unmanaged and cannot be invested in directly.
The MSCI US Broad Market Index captures broad U.S. equity coverage. The index includes 3,204 constituents across large, mid, small and micro capitalizations, about 99% of the U.S. equity universe. Indexes are unmanaged and cannot be invested in directly.
All index data from FactSet or Bloomberg.
This research material has been prepared by LPL Financial LLC.
| Not Insured by FDIC/NCUA or Any Other Government Agency | Not Bank/Credit Union Guaranteed | Not Bank/Credit Union Deposits or Obligations | May Lose Value |
RES-0006657-0126 | For Public Use | Tracking #1068441 | #1068443 (Exp. 02/2027)
Eight Takeaways from the Supreme Court’s Tariff Ruling
Jeff Buchbinder | Chief Equity Strategist
Last Updated: February 20, 2026
On February 20, the U.S. Supreme Court ruled that the Trump administration’s tariffs issued under the International Emergency Economic Powers Act (IEEPA) are illegal. The ruling invalidates a big component of President Trump’s sweeping tariff program, including reciprocal tariffs and drug‑related tariffs on Canada, China, and Mexico. These measures were imposed under national emergency declarations.
While the Court did not explicitly order refunds to be paid — instead sending that decision to the lower courts — by some estimates this decision opens the door to potentially as much as $175 billion in tariff reimbursements to U.S. importers.
Here are some of our key takeaways.
- Short-term stimulus jolt. Though mostly expected, the U.S. economy, key U.S. trading partners, and corporate America just found out they are getting a short-term stimulus boost. IEEPA had been used for an estimated roughly half of the tariffs imposed by the Trump administration. While the precise amounts are unclear, countries and companies will now play less. An overall U.S. tariff rate that had been expected in the low teens just a few months ago is now unlikely to reach double-digits, even after new replacement tariffs are imposed under different legal authority.
- Intermediate-term effects are likely to be minimal. President Trump already revealed his tariff pivot, from IEEPA to Section 122 (which allows for 15% tariffs for 150 days) and Section 301 (which takes several months to investigate). LPL Research believes most of the IEEPA tariffs can be replaced by summertime (Evercore ISI’s policy research team believes 90% of tariffs could potentially be restored).
- Trade policy uncertainty remains. While companies paying smaller tariffs is positive for profit margins and the Supreme Court ruling offers more clarity on the future path of tariffs, a lot of uncertainty remains. Markets will continue to debate whether lower courts will force the Treasury to issue refunds. In addition, it’s not clear what this decision means for trade negotiations and completed trade frameworks with other countries (notably, given the USMCA, this news doesn’t mean as much for imports from Canada and Mexico).
- Inflation impact is murky. If tariffs have not affected inflation much on the way in, then it follows that they won’t affect prices much coming out. So, while benefits to inflation will likely be minimal, taking a point or two away from expectations for where tariff rates will eventually land can reasonably be expected to lower inflation by a few basis points.
- Don’t expect Fed rate cut expectations to move much. The removal of tariffs reduces a source of friction in the real economy. Tariffs were expected to raise input costs, tighten profit margins, and weigh a bit on economic growth — slowing economic conditions are generally supportive for Treasuries. With that drag removed, growth may stabilize at the margin, and inflationary pressures embedded in the bond market could ease faster than markets previously expected. This changes the balance of risks around the Fed’s rate path and may lead to some modest repricing of rate cut expectations and incremental U.S. dollar weakness.
- We would fade the stock market bounce in tariff losers. Given tariffs are already in the process of coming back in with President Trump’s announcement of a new 10% global tariff (that didn’t take long), we wouldn’t chase any rebounds in import-heavy consumer retailers. Given mixed post-decision reactions in retailers in Friday’s trading, it appears the market is onboard with this assessment. Among tariff losers, our preference would be to play homebuilders, industrials, and technology hardware/semiconductors over apparel retailers and automakers.
- Treasury may face additional short-term funding pressure. For the Treasury market, this trade policy shift removes a meaningful — though not dominant — support to federal revenues and reopens questions about funding pressures at a time when deficits were already poised to remain in excess of $1.8 trillion annually. With less tariff income, the Treasury may need to increase issuance modestly, particularly in bills and shorter‑dated notes, to offset the lost cash flow. This could put upward pressure on yields at the margin, especially in an environment where supply and demand dynamics were already being tested. The initial selloff in the Treasury market on the news was minimal, pushing 2-year and 10-year yields up by just 2-3 basis points (U.S. 10-year Treasury yield is 4.09% as of 3pm ET on February 20).
- Refunds may introduce more near-term financing needs. Another key implication stems from the prospect of tariff refunds. Because the Court found the tariffs unlawful, many importers may now file refund claims, potentially up to $175 billion. Even if processed gradually, this creates a new near‑term financing need for the federal government. Any meaningful issuance to bridge refund‑related outflows would likely concentrate in the front end of the curve, steepening it modestly.
That’s where we see things now, but this situation is fluid. We will continue to bring updates as more information becomes available.
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