Strong Q2 despite market pullback
Equity markets lost steam in June after two months of strong gains, with the S&P 500 slipping about 1% as investors grew wary the Al rally had outrun itself. Even so, Q2 was the best quarter since 2020: the S&P 500 rose 16% and the Nasdaq 21% since March. Year-to-date, the S&P 500 is up 9.6% and the Nasdaq 12.8%, with the S&P 500 notching 24 record highs in 2026 and sitting 1.5% from another.

The Dow bucked the trend, rising 2.5% as investors rotated out of tech and into financials, healthcare, and industrials amid growing scrutiny of Al infrastructure spending. Microsoft fell 17% in June, its worst month since 2000, and Oracle fell 35%, its worst since 1990, on doubts that capital budgets were being matched by near-term returns. Semiconductor and memory-chip stocks were the quarter’s standout performers, with an index tracking the group up almost 88% since March — its best quarter on record.

The CBOE Volatility Index (VIX) held in the mid-to-high teens through June, well below the peak close of 31 during March’s Iran conflict, though it ticked up late in the month as the tech selloff intensified. Treasury yields stayed elevated as the Fed signaled it may be done cutting rates for a while. Wall Street remains broadly constructive: Barclays raised its year-end S&P 500 target to 7,800, and the median analyst target now sits at 7,850, implying 5% further upside.

U.S.–Iran deal ends war, but peace isn’t final
June’s defining development was the signing of a U.S.–lran memorandum of understanding on June 17 in Geneva, ending more than three months of conflict. The agreement calls for immediately reopening the Strait of Hormuz, lifting the U.S. naval blockade of Iranian ports, and a 60-day window to negotiate Iran’s nuclear program and sanctions relief. Pakistan, which mediated the talks, said the MOU took effect immediately; Iran has since exported more than 40 million barrels of crude at prices about 20% above pre-war levels.

Brent crude fell to roughly $78 a barrel after the signing, down sharply from conflict-era peaks but still above the $70 pre-war range. This gap reflects lingering doubt over the deal’s durability. The 60-day negotiation on the harder issues is ongoing and remains the key swing factor for energy markets and inflation in the second half of the year.

Inflation spikes, hiring slows
CPI showed headline inflation up 0.5% for May and 4.2% year-over-year, the highest annual reading since April 2023. Energy prices rose 3.9% for the month and 23.5% year-over-year; gasoline alone rose 7.0% for the month and 40.5% year-over-year, pushing the national average above $4.60 a gallon.

Core CPI, which excludes food and energy, was more contained, rising 0.2% for the month and 2.9% year-over-year. The inflation flare-up appears concentrated in energy rather than broadening across the economy.

Hiring told a more mixed story. May added a robust 172,000 jobs against expectations of 80,000, with unemployment steady at 4.3% and wages up 3.4% year-over-year. That strength didn’t carry into June, when payrolls rose just 57,000 versus 110,000 expected, though unemployment fell to 4.2%; April and May were also revised down by a combined 74,000. Economists broadly framed the slowdown as normalization after three unusually strong months, though a Conference Board survey found the share of consumers who say jobs are “hard to get” nearing a 5.5-year high.

In June, the Fed voted unanimously to hold rates at 3.50%–3.75% for a fourth consecutive meeting, issuing a statement that dropped earlier language pointing toward cuts. The median year-end rate projection rose to 3.8% from 3.4% in March. Half of the Fed officials now project at least one hike before year-end. Their next meeting is July 28–29.

Consumer sentiment continues to lag markets and corporate earnings. The University of Michigan’s index fell to 44.8 in May, an all-time low in a survey dating back to 1952, with respondents citing elevated gas prices and year-ahead inflation expectations that climbed to 4.8%. This gap between soft sentiment and strong corporate results remains a dynamic we’re watching closely.

Al spending and demand for proof of return
Q1 earnings season, which wrapped in May, was exceptionally strong. 85% of S&P 500 companies beat expectations, well above five- and ten-year averages. Blended earnings growth came in around 29% year-over-year, the fastest pace since late 2021, on revenue growth of 12%. NVIDIA’s May 20 earnings underscored the strength of Al demand, with record revenue of $81.6 billion, up 85% year-over-year, as data-center revenue nearly doubled. Reactions were extraordinary at times: Dell rose 32.8% in a single session, Snowflake jumped more than 36%, and HPE soared nearly 20%.

Big Tech’s 2026 capex guidance keeps climbing alongside that demand.

• Amazon: about $200 billion
• Alphabet: $175–$185 billion
• Meta: up to $135–$145 billion
• Microsoft: above $120 billion

Together, the top five hyperscalers are projected to spend $700–$900 billion in 2026, a 36% increase over last year. June’s sharp declines in Microsoft and Oracle show the market is no longer giving this spending an automatic pass; investors increasingly distinguish between AI investment translating into visible revenue and returns that remain unproven. We expect this bifurcation, not a broad AI selloff, to dominate as Q2 earnings season begins in mid-July.

Looking ahead
Our 2026 outlook remains constructive, though June was a reminder that the path ahead won’t be a straight line. Full-year earnings growth of 23% and revenue growth of 11% are the fastest since 2021 and 2022, respectively. Together, they continue to support valuations, even as the forward P/E sits at a level historically seen only in the dot-com and pandemic periods. The U.S.–lran framework is a positive catalyst, but the situation isn’t fully resolved and energy markets will stay sensitive to headlines from that process.

The Fed has shifted from expecting cuts to considering a hike this year, which argues for shorter-term bonds over longer-term ones in fixed income portfolios. Within equities, we favor dividend payers and are broadening into undervalued assets and private markets, while becoming more selective on Al infrastructure names given the widening gap between capex and near-term profitability at some of the largest spenders. Leading U.S. companies remain well managed, profitable, and innovative. We expect Q2 earnings season and further progress in Middle East negotiations to be the key catalysts for markets through summer.