September 2026 Rebalance: Same Convictions, Smaller Bets

Investment Policy Committee Update

By Jon McGraw, Investment Policy Committee Chair, Buttonwood Financial Group (Kansas City)

Last updated: October 20, 2026

Key takeaways

• On September 22, 2026, Buttonwood Financial Group’s Investment Policy Committee (IPC) rebalanced both our Core and Tax Aware Allocations. We kept the same convictions but made smaller bets.
• For Core Allocations, we kept the 1% equity overweight, moved to roughly neutral across regions, trimmed artificial intelligence (AI) and defense themes, and reduced active risk from about 1.6% to about 1.1%.
• For Tax Aware Allocations, we reduced the equity overweight from 3% to 2% and left AI and defense positions unchanged.
• Both the Core and Tax Aware Allocations adjusted their alternatives, and both still favor stocks over bonds.

What is an Investment Policy Committee and what does it do?

For more than 20 years, the Buttonwood Financial Group Investment Policy Committee (IPC) has followed one mission: Help clients pursue their financial goals with greater confidence across a wide range of market environments. We aim to do that by balancing two priorities (participating in market upside and building in downside resilience) and by proactively positioning investment assets around where we are in the economic and business cycle.

On September 22, 2026, we rebalanced our Core Allocations (typically used for retirement and other non-taxable accounts, and designed to trade about four to six times a year) and our Tax Aware Allocations (built for taxable accounts and more tax-sensitive, so designed to trade only about two to four times a year). Markets can also bring one-off events that prompt a rebalance outside that usual rhythm.

If we had to sum this rebalance up in a phrase: Same convictions, smaller bets. Our view of the economy and the markets (our investment thesis) has not changed much. What has changed is how much risk each of those views was carrying after a strong run in markets and a choppy summer... and we would rather manage that risk now, on our terms, than have the market manage it for us. In our Core Allocations, we chose to reduce active risk (how far an allocation can stray from its benchmark, not a forecast of gains or losses) by nearly a third, from about 1.6% to about 1.1%.

Where did markets stand around the September 22 rebalance?

The backdrop still favored stocks: Profits were outrunning prices, and the bond market was not flashing a recession warning.

• The Federal Reserve (Fed) raised rates, but the market did the work first. September’s quarter-point hike took the federal funds target range to 3.75% to 4.00%, and short-term Treasury yields had moved up well ahead of it... so the hike landed as more of a yawn than a shock. Historically, hikes have tended to come when the economy is running strong, not weak. Going back to 1988, the S&P 500 had a positive total return over the twelve months after the Fed’s first hike in six of seven cycles (the exception was 2022, when the Fed raised rates 4.25 percentage points in nine months against 9% inflation). The first weeks are usually the bumpy part, though: 45 days after a first hike, returns were positive in only two of those seven cycles. What matters from here is the pace and size of any further hikes.
• Profits were outrunning prices. Expected earnings for S&P 500 companies over the next twelve months were up about 30% this year, while the index was up about 11% (as of mid-September). In plain English, the market got cheaper relative to expected earnings even as it climbed, because earnings did the heavy lifting... and the strength reached well beyond a handful of technology companies. That is why we kept our tilt toward stocks: as long as profits keep growing, a pullback driven by rates or headlines looks more like an opportunity than a turning point (the same logic that had us lean in after a pullback in November 2025).
• The bond market was not flashing a warning, either. Long-term Treasury yields stayed above short-term ones (a “normal” yield curve), and the gap widened in late September as long-term yields rose. An inverted curve, not a normal one, has been the classic recession signal. How a curve steepens matters, too: of the five most rapid steepening periods in the past 25 years, stocks did well in the three when long-term yields held or rose, and lost ground in the two when yields fell across the board, which can be a sign of fading growth. This steepening came with long-term yields rising and the Fed raising rates, not rushing to cut... the healthier kind, based on that history.
• Energy was the swing factor. Fuel prices stepped up again in early September, and we saw higher energy prices and higher rates as the biggest near-term risks. Consumers were still spending and unemployment was low (4.1% in August), but wages were rising a little more slowly than prices (3.1% versus 3.4% over the prior year), which is why energy is the risk we are watching most closely. It cuts both ways... if energy prices ease, the pressure on rates and valuations could ease with it.
• The rest of the world was catching up. Europe was on pace for its best earnings growth in four years, which narrowed the case for a big bet on the U.S. over everyone else.

Why reduce holdings we still believe in?

We trimmed because a strong run creates its own kind of risk. Our best performers grew into larger weights on their own, and this summer’s sharp rotation (momentum stocks, many of them AI names, ran hard into late June, then reversed through July) raised the risk those positions were carrying. To be clear, this is not a call that AI is a bubble, and it is not a loss of conviction. AI-related stocks are simply a bigger, more volatile share of the market now, so a position of the same size carries more risk than it used to.

In November 2025, we called this a build-out paid for with cash flow, not a speculative mania. The demand behind it is still real: the four largest AI spenders (Amazon, Alphabet, Meta, and Microsoft) were projected to invest about $743 billion in capital projects this year, up from $413 billion in 2025, and we believe demand for computing power has kept pace. But the spending has grown faster than the cash flows paying for it, and the biggest spenders have started borrowing to keep building... one more reason to size these positions carefully rather than walk away from them. Our conviction increasingly rests on adoption: businesses that use AI to lower costs, widen margins, and build better products have every reason to keep investing.

One of the oldest mistakes in investing is failing to manage the risk around your winners, then getting shaken out of them at exactly the wrong time. Believing in an idea and controlling the size of the bet work together. We would rather stay invested in the forces we believe are driving this cycle than bet the portfolio on the next few months.

What changed in the Core Allocations in the September 2026 rebalance?

In short: the same tilt toward stocks, smaller themes, broader bonds, and re-mixed alternatives.

• We held our 1% equity overweight (one percentage point more in stocks than the allocation’s benchmark). We trimmed it from 3% to 1% in May 2026, and it stays there, still tilted toward stocks over bonds.
• We moved regional positioning to roughly neutral, adding two to five percentage points to international stocks (mostly developed markets outside the U.S.) and reducing U.S. stocks and our themed positions to make room.
• We kept our themes, in smaller sizes. Our dedicated AI position came down one percentage point in our four most growth-oriented allocations (60/20/20 and above; each allocation is named for its stock, bond and alternatives mix), and defense came down one to two points in most allocations (out entirely in our two most conservative). We also trimmed factor-rotation exposure and added an actively managed strategy that rotates among U.S. industries.
• We broadened what our bonds rely on. We sold our index mortgage-bond position (three to six percentage points, depending on the allocation) and reinvested those proceeds into an actively managed bond strategy and international government bonds. Interest rates remain hard to forecast, so our short-duration tilt stays modest. (Duration measures how sensitive a bond is to changes in interest rates; shorter duration generally means less sensitivity.)
• We re-mixed alternatives without changing the amount of assets allocated. We added a new systematic alternatives strategy (a rules-based fund that draws on stocks, credit, and broader economic trends) and a little more gold, funded by trimming the three alternatives strategies we added in May 2026.

What changed in the Tax Aware Allocations in the September 2026 rebalance?

In short: a slightly smaller tilt toward stocks, with AI and defense positions unchanged.

• We trimmed the equity overweight from 3% to 2%: one percentage point out of stocks in every Tax Aware allocation, moved into bonds (or into alternatives in our 90/0/10, which holds no bonds). We are still tilted toward stocks.
• We kept regional moves small. A few allocations added a little to developed markets outside the U.S., and most of the stock trim came out of U.S. stocks.
• We tidied up the U.S. stock mix, exiting a low-volatility factor position in our three most growth-oriented allocations, trimming U.S. value, and adding to a broad U.S. equity strategy. AI and defense positions are unchanged.
• We made two changes to our municipal bond holdings: We moved a few percentage points from long-term into intermediate-term munis (in keeping with our preference for shorter duration), and we replaced one long-term national muni fund with another from a different manager. Our two most conservative allocations also picked up a small convertible bond position (bonds that can convert into stock under set terms, so they carry characteristics, and risks, of both bonds and stocks).
• Alternatives were re-mixed the same way as Core: a new systematic alternatives strategy and a little more gold, funded mostly from the three existing strategies.

Themes: How does the September 2026 rebalance connect to our earlier updates?

If you have read our recent updates, you will recognize the shape of the story:

• November 2025: we leaned in, raising our equity overweight from 1% to 3% after a pullback.
• March 2026: refinement, not retreat... still risk-on, more selective, and more diversified.
• May and June 2026: we locked in some gains (taking Core from 3% to 1%), upgraded the quality of our bonds, and added liquid alternatives to both families.
• September 2026: same convictions, smaller bets.

Through all of it, the shape has held: the barbell we described in November 2025, with growth-oriented conviction on one end and ballast to help cushion the downside on the other. In March we strengthened the ballast with higher-quality bonds, in May and June we added liquid alternatives underneath, and this time we trimmed the conviction end and broadened what our bonds rely on.

Same mission. Same process. Adding risk when we believe we are paid to take it, and trimming after a strong run... that is our logic and discipline working the way they were designed to.

What does the September 2026 rebalance mean for your investments?

For most clients in our Core and Tax Aware Allocations, this looked like a modest re-mix inside your allocation rather than a change in its overall shape: a little less in U.S. stocks, plus a little more international and smaller themed positions in Core and a slightly smaller tilt toward stocks in Tax Aware. Both the Core and Tax Aware Allocations also saw changes inside their bond and alternatives sleeves. If your accounts use one of our other allocations, or you would simply like to see exactly how this looks at the holding or account level, please let us know, and your Advisory Team can walk you through any of it.

And as always, if there is a change in your life or cash flow, or a planning question that should factor into how your investments are positioned, please tell us. That context is what turns an investment portfolio into a plan.

Thank you,

Jon McGraw

Investment Policy Committee Chair

Frequently asked questions

Did Buttonwood move out of stocks in the September 2026 rebalance?

No. Buttonwood’s Core Allocations kept a 1% equity overweight, and its Tax Aware Allocations trimmed theirs from 3% to 2%, so both still lean toward stocks over bonds.

Is Buttonwood’s Investment Policy Committee calling an AI bubble?

No. The IPC trimmed dedicated AI positions in its most growth-oriented Core Allocations because AI stocks have become a larger, more volatile share of the market. AI positions in the Tax Aware Allocations did not change.

Why do Tax Aware Allocations rebalance less often than Core Allocations?

Trades in taxable accounts can carry a tax cost. Buttonwood’s Core Allocations are designed to trade about four to six times a year and its Tax Aware Allocations about two to four times a year, and one-off market events can prompt a rebalance outside that rhythm.

What is active risk?

Active risk measures how far an allocation can stray from its benchmark; it is not a forecast of gains or losses. In September 2026, Buttonwood cut active risk in its Core Allocations from about 1.6% to about 1.1%.

Does rebalancing guarantee better returns?

No. Rebalancing is a risk-management and diversification discipline. It does not guarantee a profit or protect against loss, and diversification does not ensure against market risk.

Important Disclosures

This update is provided by Buttonwood Financial Group for educational and informational purposes only and reflects the views of the Investment Policy Committee as of October 20, 2026. It is not personalized investment advice or a recommendation to buy, sell, or hold any security or to adopt any investment strategy. Market figures come from third-party sources believed to be reliable, including Bloomberg data and Morgan Stanley and Goldman Sachs estimates as of September 18, 2026, Barclays research, U.S. Bureau of Labor Statistics data for August 2026, U.S. Treasury yield data as of October 1, 2026, Reuters and FactSet reporting from July 2026, and a Jacobi Strategies analysis of yield curve history published in October 2024, and are not guaranteed. Indexes are unmanaged, and one cannot invest directly in an index. Investing involves risk, including the possible loss of principal. Diversification and asset-allocation strategies (including liquid alternatives) do not ensure a profit or protect against loss and may underperform other strategies. Past performance is not indicative of future results. Forward-looking statements are subject to change and are not guarantees of future outcomes. Buttonwood Financial Group is a registered investment adviser. Registration does not imply a certain level of skill or training, nor does it imply approval by the SEC.