2023 Midyear Outlook: Asset Allocation Risks and Opportunities

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What a year it has been for financial markets. There have been several negative factors in play, including a high-single-digit inflation print, the ongoing war in Ukraine, and several regional bank failures. Nonetheless, the S&P 500 finished the second quarter up 17 percent for the year. Go figure!

Rather than reflecting on what happened, instead I’d like to focus on the potential risks and opportunities as we move into the second half of the year. The executive summary—for those who like to read the punch line first—supports a thoughtful rebalancing approach to trim asset classes that have performed extremely well and to move into areas that haven’t delivered strong returns thus far in 2023. Let’s take a closer look.

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It’s hard to ignore the recent performance disparity under the surface in U.S. equities. It’s a period reminiscent of the 2020–2021 cycle, which saw growth stocks and technology stocks in particular drive the market notably higher in an economic environment that could be politely described as underwhelming.

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