QUARTERLY MARKET UPDATE as of  July 2026

Stocks staged a powerful rebound in the second quarter, more than recovering the ground lost during a difficult first quarter.                The S & P 500 gained 15%, reaching new highs for the year after having declined 5% in the first quarter. Technology was the best performing sector, with semiconductors the standout performers as spending on artificial intelligence infrastructure continued to accelerate. Most sectors were up for the quarter except for Energy, which declined nearly 14%. Oil prices retreated sharply from their April highs with the Iran conflict winding down. Small caps were the surprise leader among the broad indices, with the Russell 2000 Index surging 21%, while international stocks as measured by the MSCI EAFE Index advanced 11%.

The bond market told a more cautious story. With inflation re-accelerating, intermediate and long-term yields remained elevated. The yield on the 10-year Treasury note ended the quarter at 4.47%, while the 30-year bond closed at 4.97% after reaching as high as 5.2% in May.  Unlike a year ago, when investors were pricing in a series of rate cuts, the market has now largely abandoned hopes for lower short-term rates this year. The Federal Funds rate remains in a range of 3.5% to 3.75%, where it has stood since the Federal Reserve’s last reduction.

The most significant development this quarter came from the Federal Reserve itself. The June meeting was the first chaired by Kevin Warsh, who succeeded Jerome Powell. The Committee voted unanimously to hold rates steady, but the tone shifted notably. The Fed’s updated projections now show a median expectation for the Federal Funds rate to end the year at 3.8%, up from 3.4% in the prior forecast. The central bank is currently leaning towards a rate increase rather than the cuts the market had long anticipated.

The conflict in the Middle East has become the dominant macroeconomic story of the year. Disruptions to shipping through the Strait of Hormuz produced the largest supply shock in the history of the global oil market, and crude prices spiked more than 60% above their pre-conflict levels at the April peak. Prices have since retreated, with the international benchmark falling back near pre-war levels to $70 a barrel following an interim agreement between the United States and Iran and the reopening of the Strait.

Inflation had been gradually easing for much of the past three years, but has reversed course. The Fed’s preferred gauge, the core Personal Consumption Expenditures Index, rose 0.3% in May and climbed to 3.4% on an annual basis, the highest reading since October of 2023. The headline PCE index, which includes the volatile food and energy components, accelerated to 4.1%, its fastest pace in three years. While a decline in energy prices last month will help offset the increase, it is also being countered by a sharp rise in semiconductor costs.  Driven by the AI boom, there has been a massive global shortage of memory and storage chips. This has led to a 10% to 15% price increase in PC and smartphones, and manufacturers are already passing on these costs to consumers.

The Fed’s dual mandate is to promote maximum employment alongside stable prices, and at present those two goals are pulling in opposite directions. On the employment side, the labor market has remained resilient. The unemployment rate held at 4.3% in May and has stayed within a narrow band of 4.3% to 4.5% for nearly a year. Employers added 172,000 jobs in May, well above expectations, and wages continued to grow at about 3.4% over the past year. With employment essentially at the Fed’s target and inflation moving in the wrong direction, the case for holding rates, or even raising them, has strengthened.

Economic growth has been uneven. After expanding at a tepid 1.6% annual rate in the first quarter, the economy appears to have regained some footing, with the Atlanta Fed’s GDP Now model currently estimating second quarter growth of about 2.5%. This is solid but not robust, and the combination of only moderate growth with rising inflation revives uncomfortable memories of the stagflationary conditions of earlier decades. The Fed’s challenge is to restrain inflation without choking off the expansion, a delicate balance made all the harder by a supply shock that monetary policy cannot control.

The market’s strong rebound and new highs leave valuations stretched, particularly among the large technology names that have driven so much of the gain. With a more hawkish Fed, sticky inflation, and an unresolved geopolitical situation, we believe a measure of caution is warranted, and we would not be surprised by a period of profit taking or a correction. At the same time, we do not see evidence of a pending recession or bear market, and we would view meaningful pullbacks as buying opportunities in the best valued sectors and industries.