Corporate fundamentals have been strong, particularly in the US, but heavily concentrated in mega-cap tech stocks.

Investment Implications

• Equities tend to benefit in the months following rate cuts in a “no recession” environment. With the Federal Reserve just starting the cutting cycle to normalize rates, this could extend the runway for the current bull market. Rate cuts might boost market segments such as small caps and value stocks, which were hindered by higher-for-longer rates and lagged mega-cap tech.

• Bull markets can still be punctuated by periods of drawdowns. When fundamentals appear healthy, investors should remain confident to weather volatility and stay invested, given best-performing days have tended to follow soon after. Missing such days drastically reduces long-term returns. Example: August 2024’s drawdown came on the back of unwinding popular trades, but fundamentals looked sound, and the bull market regained its footing soon thereafter.

• As inflation has eased, bond correlation with equities is normalizing, improving bond-diversification benefits in the event of a weak growth-induced bear market. Although 60/40 strategies³ experienced their worst return in decades during the 2022 bear market, our confidence in such allocations as a diversifier has improved with the inflation outlook.

What We Are Watching

• Signs of economic deterioration — The backdrop continues to look healthy with buoyant US GDP and employment numbers. Fears of a slowdown have yet to be meaningfully supported by hard data. When the data weakens, it doesn’t bode well for bull markets.

• Corporate earnings growth and broadening — Corporate fundamentals have been strong, particularly in the US, but heavily concentrated in mega-cap tech stocks. Sustained earnings growth is not only indicative of a continued bull run, but growth stemming from a wider selection of industries is supportive of a more sustainable market rally moving forward.

• The rise of speculative investments — Heightened investor frenzy on assets increasingly detached from fundamentals could signal the end of the bull market. Harbingers of the end of the post-COVID-19 bull market such as bitcoin and SPACs⁴ (Special Purpose Acquisition Companies) are not in the same bubble territory today.

Talk to your financial professional to help position your portfolio for potential growth.

¹ The Magnificent Seven stocks are a group of high-performing and influential companies in the US stock market: Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA, and Tesla.

² The S&P 500 Index with Global Financial Data (GFD) extension refers to the S&P 500 Index data that has been extended historically by Global Financial Data, a data-research firm based in San Juan Capistrano, CA. The extension of the S&P 500 Index data involves the use of original records and historical documents to provide a continuous and uninterrupted time series of data, going back much further than traditional data sources.

³ A "60/40 strategic asset allocation" refers to an investment strategy where 60% of a portfolio is allocated to stocks (considered "growth assets") and 40% is allocated to bonds (considered "stable assets"), essentially aiming to balance potential high returns from stocks with the stability of bonds, creating a moderate risk profile for investors. Wellington used the S&P 500 Index as a proxy for the equity allocation and the Bloomberg US Aggregate Bond Index as a proxy for the fixed-income allocation. Bloomberg US Aggregate Bond Index is composed of securities that cover the US investment-grade fixed-rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities.

⁴ A Special Purpose Acquisition Company (SPAC) is a shell corporation that raises money through an initial public offering (IPO) to acquire or merge with an existing company. SPACs are also known as "blank check companies". They are registered with the U.S. Securities and Exchange Commission (SEC) and are publicly traded companies. The general public can buy shares of a SPAC on a stock exchange before a merger or acquisition takes place.

Important Risks: Investing involves risk, including the possible loss of principal. Security prices fluctuate in value depending on general market and economic conditions and the prospects of individual companies. • Small-cap securities can have greater risks, including liquidity risk, and volatility than large-cap securities. • Different investment styles may go in and out of favor, which may cause  underperformance to the broader stock market. • Fixed income security risks include credit, liquidity, call, duration, and interest-rate risk. As interest rates rise, bond prices generally fall. Diversification does not ensure a profit or protect against a loss in declining market.The views expressed here are those of Wellington Management, are for informational purposes only, and are subject to change based on prevailing market, economic, and other condtions.

The views expressed may not reflect the opinions of Hartford Funds or any other sub-advisere to our funds. They should not be construed as research or investment advice nor should they be considered an offer or silicitation to buy or sell any security. This information is current at the time of writing and may not be reproduced or distributed in whole or in part, for any purpose, without the express written consent of Wellington Management or Hartford Funds.