Market Update – June 2026

For much of the past three and a half months, the stock market’s prospects have revolved around three key themes: the status of the Strait of Hormuz, apparent rising hawkishness at the Federal Reserve, and a growing belief in AI as a catalyst for improved economic growth and corporate profitability. The second quarter has most clearly seen the last of these themes dominate the attention of market participants, while the first has largely been viewed as a temporarily significant disruption.

Over the course of this past week, a number of key events touching each of these themes have unfolded. The United States and Iran virtually signed a “memorandum of understanding” to agree to a ceasefire in hostilities and the reopening of the Strait of Hormuz; an in person signing (with JD Vance as the US’s representative) is set for this week in Switzerland.

Within 24 hours of the last announcement, the AI trade driving markets saw another high-profile step forward as Elon Musk’s SpaceX stepped into the public with the largest IPO launch ever.

Finally, yesterday saw the Federal Reserve’s first interest rate decision with Kevin Warsh as the new chairman. The Fed’s decision to hold benchmark interest rates at their current level went widely as expected, but the procedural nuances around the announcement and a hawkish inflation centric outlook provided some points of notice.

With the headwind of the Strait’s closure alleviated for now, additional tailwinds from SpaceX’s IPO success, and the backdrop of a strong recent earnings quarter, there is ample evidence and adjacent sentiment, that the market’s rally from the March lows should continue.

However, the first half of June has seen a pause in the rally, along with moments of high volatility, as market participants digest a resurgence in inflation and the ramifications it holds for a Fed under new leadership. Wednesday’s Fed meeting added to the potential concerns that the next move for interest rates may be higher as opposed to lower.

Market Summary

As mentioned in our introduction, June has been both an eventful and volatile month for equity markets relative to two prior months of essentially uninterrupted gains.  The S&P 500, NASDAQ, Dow Jones, and Russell 2000 each made new all-time highs earlier this month, but have all suffered varying degrees of setbacks since.  

A combination of a resumption in U.S. strikes on Iran and a mixed earnings outlook from semiconductor giant Broadcom pushed the S&P 500 ~-4.5% off of its all-time highs.  The recent ceasefire helped the index take back the bulk of these losses, but the index remains off the highs by ~-1.5% following yesterday’s post Fed day slippage. 

On a year-to-date (YTD) and quarter-to-date (QTD) basis, stock market returns remain broadly positive. U.S. large caps via the S&P 500 have returned 9% YTD and ~14% QTD. Small caps continue to outperform their large cap counterparts on a YTD basis (~18.3%) and have over the past month taken the lead QTD (~17.2%) as well.

On a regional basis, foreign equities have also performed well on an absolute basis, but there continues to be some recent divergence in performance depending on economic group relative to stocks in the U.S. International developed stocks and emerging market equities both lead the S&P 500 on a YTD basis, with returns of ~11.3% and ~28.2% respectively.

Emerging markets have seen tremendous outperformance QTD as well at ~28.3%, while international developed stocks have seen slight relative underperformance (~12.5%). Tempering some of the international gains relative to those in the U.S. has been the dollar, which is once again approaching YTD highs in DXY index terms.

Despite a sharp selloff (~-11.5% QTD), courtesy of the de-escalation in the Iran conflict, the energy sector continues to be the top performer in the S&P 500 on a YTD basis (~22.4%).

Energy’s setback has seemingly been to the technology sector’s benefit, as tech’s tremendous rally QTD (~30.1%) has brought its YTD gain to ~18.2%. The price chart below of the energy and technology sector’s returns over the course of this year expresses both their relationship YTD and exemplifies the starkly different quarters dividing the first half of 2026.

S&P 500 Sales and Earnings Data- As of 6/17/2026 (Bloomberg)

Opening the Strait of Hormuz and the Evolving AI Theme

It makes sense that a reversal in energy and rally in technology would be a positive in aggregate to the U.S. stock market.

On a market cap basis, the information technology sector sits as the largest representative sector in the S&P 500 at over 37.5% while energy makes up just ~3.1%, good for the fourth smallest sector weighting. As it pertains to both economics and fundamentals, rising energy prices benefit companies in the energy sector via higher earnings, while most of the remaining corporate world and the end consumer experience financial strain.

Fortunately, crude futures have fallen drastically on optimism that the 14-point memorandum between the U.S. and Iran will reopen the strait and allow the more than 500 tankers currently stuck in the Persian Gulf to ship their oil. AIS Tracked ship crossings over the past 7-days are still at 0, but dark-fleet vessels are still making it through.

In combination with the Joint Maritime Information Center downgrading the threat level in the Strait from “severe” to “substantial”, means we might see a pickup in compliant-fleet volume if signs point to an allowance of crossings. Alternatively, insurance companies might still require ships to wait for an “all-clear” to be able to pass through.

Crude futures are now back to levels of the first week of March with the long-term futures sloping downwards in the latter half of the year down to $72 in the December contract. The Gulf is still likely on a “months, not weeks” timeline with projections showing early ’27 for a return to the pre-war normal according to the U.S. Energy Information Administration.

A key caveat is that this is still a memorandum of understanding and not a final deal. The provisions that matter most to energy markets are front-loaded, but the more difficult negotiations are still ahead with a 60-day window to reach a final agreement. The biggest of these provisions is the disposal and assessment of Iran’s enriched uranium stockpile, which is the top priority for the U.S. and the most likely point for a final deal to stall.

A major tailwind for equity markets remains artificial intelligence. Investor enthusiasm for the theme continues to be evident, with SpaceX serving as one of the highest-profile examples. Since its public debut, shares have appreciated more than 30%, reflecting continued capital inflows from both retail and institutional investors seeking exposure to the next phase of AI infrastructure development. The company briefly surpassed both Amazon and Microsoft in market cap value, becoming the fourth largest company in the world.

Beyond launching services and communications, investors are increasingly focusing on the potential for satellite-based computing networks to supplement traditional terrestrial data centers. If successful, such an approach could alleviate some of the regulatory, permitting, and power-generation bottlenecks that have become a growing concern for the long-term AI buildout story.

The AI investment landscape may also broaden considerably over the coming year. Potential public offerings from leading model developers such as OpenAI and Anthropic would provide investors with direct exposure to the application and software layers of the AI ecosystem rather than concentrating capital solely in semiconductor and memory-related companies. Such diversification could prove important if memory pricing eventually normalizes and hardware providers face more difficult year-over-year comparisons.

Long term investors should continue monitoring developments in recursive self-improvement, where AI systems contribute increasingly larger portions of their own code development and optimization. If models eventually demonstrate the ability to meaningfully improve future generations of themselves, the result could be a powerful positive feedback loop that accelerates innovation and productivity beyond current expectations.

At the same time, the AI trade is not without risks. Valuations across many AI centric and adjacent companies have expanded significantly this year, raising the possibility of short-term overextension should earnings growth fail to keep pace with investor expectations.

Capital spending commitments throughout the industry remain enormous and will ultimately require substantial revenue generation to justify current investment levels. Regulatory scrutiny is also increasing, with governments beginning to place restrictions on access to advanced models and companies delaying broad releases of their most capable systems due to cybersecurity and national security concerns.

In the realm of domestic politics, AI has seen a collapse in popularity. A March 10th NBC news survey saw 57% of registered voters state that they believe the risks of AI outweigh the benefits, compared to 34% who said the opposite. A small 26% of voters say they have positive feelings about AI, compared to 46% who hold negative views (source). It would not be a surprise to see regulation of AI emerge as a key focus of the upcoming midterm elections.

Finally, competitive dynamics remain intense, as users have demonstrated a willingness to quickly migrate toward whichever provider offers the leading model, suggesting that market leadership may prove more transient than many investors currently assume.

Despite these risks, the levels of corporate investment in AI remain enormous; the four largest hyperscalers (Microsoft, Amazon, Alphabet, and Meta) are collectively expected to spend $700-725 billion of CAPEX (up 75-80% from 2025 levels) with the vast majority directed towards AI infrastructure, data centers, networking, power generation, and compute capacity.

The Fed and Economy

Yesterday’s stock and bond market dynamics, and the ongoing adjustment to interest rate expectations (via the Fed Funds futures market), suggests a growing unease among market participants in where the U.S. central bank will take policy for the remainder of this year. This market activity occurred despite yesterday’s decision to keep the federal funds rate at the same level, transpiring just as markets anticipated.

While there were seemingly no dissents to keep the current level of fed funds target, the frequent of focus “dot plot” took the spotlight with both its shift in hawkishness and its omissions.

Implied Federal Funds Rate Projections– As of 6/17/2026 (Bloomberg) 

The Federal Open Market Committee (FOMC) split their projections 9-8-1 between those who expected hikes, holds, and a cut for the rest of the year.  This both shifted the bias of the Fed towards a hawkish inflation fighting tilt and moved the median FOMC dot to a 0.25% increase in rates.  Although this shift in the dot plot drew attention, the absence of a dot from the 19 members of the FOMC was also a highlight, as Kevin Warsh did as some speculated and abstained from presenting his forward guidance.   

Warsh has previously expressed a belief that the practice of forward guidance from the Fed may hamstring the central bank’s future policy.  This belief sits alongside several philosophical differences from his predecessor.  

The new chairman announced at his press conference today the formation of five task forces that will be charged with assessing certain aspects of Fed policy: communication, the Fed’s balance sheet, data sources on which the Fed relies, productivity and jobs, the impact of transformative technologies such as AI, and the central bank’s approach to inflation.  In another sign of change, the post-meeting statement from Warsh contained a statement made up of just 130 words compared to those of the recent past that often contained over 300.   

Despite the shift in writing and rhetoric, the shift in hawkishness was likely inevitable regardless of who would be chairing the Federal Reserve due to the most recent inflation related data.  

June 10th’s Consumer Price Index (CPI) data (for May) saw a month-over-month increase of 0.5% in headline CPI growth, 4.2% growth year-over-year for the same measure.  Core CPI saw growth of 2.9% year-over-year, in line with estimates but higher than April’s figures; the month-over-month core inflation figure showed deceleration from April (0.4%) and was below expectations at 0.2% vs 0.3% forecasted.  

Perhaps the most hawkish sign as it pertains to monetary policy is not the level of inflation or the tilt in projections from the Fed, but instead the recent moves from other nations’ central banks.  The Bank of Japan, Reserve Bank of Australia, and European Central Bank have all initiated rate hikes in 2026.   

Although the inflation and rates picture has taken a turn higher in recent months, our belief is that the most powerful underlying force causing the inflationary surge is that of the oil supply shortage from the Strait of Hormuz.  If the memorandum and ongoing negotiations hold, and the Strait effectively reopens as expected, the recent declines in oil prices are likely to sustain as a near-term month-over-month tailwind of deceleration in inflation.  

Prior to the conflict in the Middle East, the consensus expectations from both market participants and policymakers were that the easing cycle in interest rates was set to resume as inflationary forces abated in the second half of this year.  We continue to view this as a potential possibility that appears to now be underestimated by markets.  

Conclusion

As we move into the second half of the year, the investment landscape continues to be shaped by the interaction of geopolitics, monetary policy, and technological innovation.  

The tentative reopening of the Strait of Hormuz has begun to alleviate one of the market’s most significant near-term risks, while the continued acceleration of investment in artificial intelligence has reinforced optimism surrounding productivity gains, corporate profitability, and long-term economic growth.  Together, these developments provide a constructive backdrop for equities, particularly if energy prices continue to moderate and support a gradual easing of inflationary pressures. 

At the same time, investors should remain mindful of the risks that accompany these opportunities.  Valuations across many AI-related companies have expanded considerably, while regulatory scrutiny of emerging technologies continues to increase, and the Federal Reserve has adopted a more hawkish posture amid recent inflation data.  

Markets are also adjusting to a new era of leadership at the Fed, introducing an additional layer of uncertainty around the future path of monetary policy.  While volatility is likely to persist as investors weigh these competing forces, we believe maintaining a disciplined, diversified investment approach remains the most effective way to navigate the current environment. 

As always, we will continue to monitor developments across the economy, financial markets, and the geopolitical landscape, and we remain committed to communicating with you openly as conditions evolve.