Confluence Asset Allocation Quarterly

Confluence Investment Management's Third Quarter 2026 Asset Allocation Outlook anticipates a low recession likelihood over the next three years, with economic growth near trend, supported by business investment and dovish Fed policy. Inflation is expected to remain between 2.5-3.5%, above the Fed's target. The outlook suggests a rotation in risk markets with broadening leadership. Passive flows are seen as a structural tailwind for US equities, favoring large caps. International developed equities are positioned for stronger relative performance due to fiscal support, valuations, and a weaker US dollar. Gold is expected to benefit from central bank buying and dollar weakness.

The US GDP growth is projected to be near its long-run trend, with low but not zero recession risk, driven by supportive fiscal and dovish monetary policies. The labor market is expected to transition towards gradual moderation, with slower hiring and reduced job openings rather than widespread layoffs. Trade policy uncertainty and AI adoption are influencing hiring and staffing needs. Sector-specific employment growth is noted in healthcare and leisure/hospitality, while new entrants face challenges. Government funding risks add to uncertainty.

Inflation is expected to stay above the Federal Reserve's 2% target, ranging from 2.5-3.5%, due to sticky services inflation, demographic constraints on labor supply, and fiscal support. Services inflation is anticipated to moderate slower than goods inflation. Tighter immigration policy may also pressure wages due to constrained labor force growth.