Market Commentary

• The pace of change on the tariff and geopolitical fronts is moving fast and adjusting on a day-to-day basis.
• Our current assumptions for asset-class performance encourage us to stick with higher-quality equities and fixed-income exposure.

This week we thought it might be a good idea to review some of the broad issues that we believe are likely to impact investors and their portfolios in coming months. With the pace of change on the tariff and geopolitical fronts moving fast and sometimes adjusting on a day-to-day basis, investors are wondering what they might do to help navigate the uncertainties. We are assuming that these uncertainties will be in play for the next few months if not longer. We want to have a plan to help us navigate through bumpy markets but also one that seeks to take advantage of opportunities that may further present themselves.

The first rule of thumb for our plan is to focus on quality in a diversified manner. For example, in the equity market, we continue to favor large- and mid-capitalization equities over small-cap. Larger-capitalization companies generally tend to have stronger balance sheets, more dependable cash flows, easy access to credit, an ability to buy back shares, and a wider range of products and/or services than their smaller-cap brethren. In our view, a preference for larger-capitalization U.S. companies translates to a preference for higher-quality equities that can potentially weather an economic slowdown.

When it comes to specific equity sectors, we carry a most favorable rating for the Energy sector and favorable ratings on Information Technology, Financials, and Communication Services. We believe these sectors feature long-term growth drivers and robust balance sheets. We suggest investors put funds to work in these sectors at current market levels. In our view, the pullback in stocks offers long-term investors an attractive entry point.

We are also assuming that the Federal Reserve will cut interest rates three times this year if growth slows and the unemployment rate ticks higher as we expect. We believe the yield on the 10-year Treasury note will end the year in the 4% to 4.5% range. Our approach in the fixed-income market is to be selective and focus on investment-grade corporate bonds and essential-service municipal bonds in the three to seven year maturity range. A number of the other major global central banks (i.e., European Central Bank or ECB) have been in rate-cutting mode. We believe these rate cuts should help the global economy perform somewhat better as we move through the second half of this year and into 2026.

Our current assumptions and projections for asset-class performance encourage us to stick with higher-quality equities and fixed-income exposure.¹ The near-term road ahead will likely be bumpy with policy and geopolitical headlines driving financial markets on a day-to-day and week-to-week basis, unpredictably. The U.S. is in the early stages of trade-policy negotiations with a number of our trading partners. We believe it will likely take time to reach final agreements with many of these partners.

¹ Wells Fargo Investment Institute year-end 2025 projections for equity asset classes, U.S. gross domestic product and inflation, and 10-year U.S. Treasury yields.

Forecasts, estimates, and projections are not guaranteed and are based on certain assumptions and views of market and economic conditions which are subject to change.

Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets, especially foreign markets, are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Foreign investing has additional risks including those associated with currency fluctuation, political and economic instability, and different accounting standards. These risks are heightened in emerging markets. Small- and mid-cap stocks are generally more volatile, subject to greater risks and are less liquid than large company stocks. Bonds are subject to market, interest rate, price, credit/default, liquidity, inflation and other risks. Prices tend to be inversely affected by changes in interest rates. Municipal bonds offer interest payments exempt from federal taxes, and potentially state and local income taxes. Municipal bonds are subject to credit risk and potentially the Alternative Minimum Tax (AMT). Quality varies widely depending on the specific issuer. Municipal securities are also subject to legislative and regulatory risk which is the risk that a change in the tax code could affect the value of taxable or tax-exempt interest income.

Sector investing can be more volatile than investments that are broadly diversified over numerous sectors of the economy and will increase a portfolio’s vulnerability to any single economic, political, or regulatory development affecting the sector. This can result in greater price volatility. Communication services companies are vulnerable to their products and services becoming outdated because of technological advancement and the innovation of competitors. Companies in the communication services sector may also be affected by rapid technology changes; pricing competition, large equipment upgrades, substantial capital requirements and government regulation and approval of products and services. In addition, companies within the industry may invest heavily in research and development which is not guaranteed to lead to successful implementation of the proposed product. The Energy sector may be adversely affected by changes in worldwide energy prices, exploration, production spending, government regulation, and changes in exchange rates, depletion of natural resources, and risks that arise from extreme weather conditions. Investing in the Financial services companies will subject an investment to adverse economic or regulatory occurrences affecting the sector. Risks associated with the Technology sector include increased competition from domestic and international companies, unexpected changes in demand, regulatory actions, technical problems with key products, and the departure of key members of management. Technology and Internet-related stocks, especially smaller, less-seasoned companies, tend to be more volatile than the overall market.

Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index.

Russell 3000® Index measures the performance of the 3,000 largest U.S. companies based on total market capitalization, which represents approximately 98% of the investable U.S. equity market.

An index is unmanaged and not available for direct investment.

Investment Grade bonds - A rating that indicates that a municipal or corporate bond has a relatively low risk of default. Bond rating firms, such as Standard & Poor's, use different designations consisting of upper- and lower-case letters 'A' and 'B' to identify a bond's credit quality rating. 'AAA' and 'AA' (high credit quality) and 'A' and 'BBB' (medium credit quality) are considered investment grade. Credit ratings for bonds below these designations ('BB', 'B', 'CCC', etc.) are considered low credit quality, and are commonly referred to as "junk bonds".

Global Investment Strategy (GIS) is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.

The information in this report was prepared by Global Investment Strategy. Opinions represent GIS’ opinion as of the date of this report and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.

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