What Did We See?
- U.S. Large Cap stocks, or the S&P 500 index, were up about 15% in Q2.
- Asia ex-Japan was the best-performing major equity market, up 28%, led by Korea (+88%) and Taiwan (+49%).
- Emerging Markets skyrocketed 24% — their best quarterly gain since 2009.
- Developed international markets gained close to 14%; Europe ex-UK was up 14%, and Japan’s TOPIX was up 14%.
- The UK (FTSE All-Share) lagged other regions, up about 5%, weighed down by its more defensive, commodity-tilted composition.
- Small caps gained roughly 15-21%, depending on the index; Growth stocks outperformed Value by nearly 10 percentage points.
- The Bloomberg Global Aggregate Index was roughly flat, up 0.9%, as global bond markets lacked clear direction.
- Commodities were the outlier: Brent crude fell 38%, and gold and precious metals fell more than 10%.
Where Do We Stand?
- Markets rallied on earnings, not the Fed — new Chair Kevin Warsh’s hawkish debut barely moved sentiment.
- The Iran ceasefire and the reopening of the Strait of Hormuz drove the reversal — and remain fragile, not fully resolved.
- The labor market is cooling quietly beneath the surface, even as headline data stays mixed.
- Valuations are stretched by nearly every measure, but real earnings growth — not hope — is doing the heavy lifting this cycle.
- Concentration risk is rising quietly: a handful of companies are driving an outsized share of index returns.
- Bonds went basically nowhere. The Global Aggregate Index eked out a 0.9% gain as yields chopped around, unable to decide whether inflation or growth worries mattered more.
- Commodities were the outlier. Oil collapsed 38% and gold fell more than 10% as the war in Iran de-escalated and the “currency debasement” trade lost steam.
A quarter ago, this letter was about the Strait of Hormuz, an oil spike, a tariff ruling, and a stock market that had just posted its worst quarter in years. If you’d told most investors in April that the S&P 500 was about to have its best quarter since 2020, they’d have laughed you out of the room. That’s the lesson worth sitting with more than any single data point below: being rightfully defensive during Q1 did not help you during Q2. Markets can quickly move from one regime to the next and back again. Sometimes waiting for clarity can hurt in the short term but often not making a big mistake is the right course of action.
A New Fed
Clarity certainly didn’t come from the Fed. Kevin Warsh was sworn in as Fed Chair on May 22, and his first meeting at the helm was about as hawkish a debut as you’ll see: rates held at 3.50%-3.75%, forward guidance toward cuts scrapped entirely, and a dot plot that now shows more committee members leaning toward a hike than a cut before year-end. Markets shrugged it off. Earnings, not the Fed, drove this quarter, and that’s a healthier dynamic than it might sound.
Cooling Labor Markets
The labor market sent decidedly mixed signals. May payrolls surprised to the upside at 172,000. June came in at just 57,000, well below expectations, with April and May collectively revised down 74,000. Wage growth at 3.5% year-over-year continues to trail inflation, and labor force participation slipped to a five-year low of 61.5%. This isn’t a labor market falling apart — it’s one cooling in a way that gives the Fed cover to stay cautious rather than urgent.
Elevated Multiples
On valuations, the honest answer is: they’re stretched by almost every historical measure. The trailing P/E ratio sits at its third-highest reading since 1900. The Shiller CAPE is at its second-highest level ever. The dividend yield has never been lower. That’s worth taking seriously — but it’s also not the full picture. Q1 earnings season was the strongest since 2021, with 85% of S&P 500 companies beating estimates. Full-year 2026 global earnings growth estimates have been revised up 11 percentage points since the war began, to 27.6%. U.S. hyperscalers keep raising AI capex guidance, now north of $700 billion for the year. Elevated multiples built on real, accelerating profit growth are a different animal than multiples built on hope alone. Different, not risk-free — invest with this in mind.
A Lack of Breadth
There’s also a concentration wrinkle worth knowing about, even if it doesn’t change what we do day to day. The 10 largest companies in the S&P 500 now represent nearly 40% of the index. A level not seen since the mid-1960s, and semiconductor-related companies alone are approaching one-fifth of it. Emerging markets show the same pattern in a more extreme form: three companies — TSMC, Samsung, and SK Hynix — make up 29% of the MSCI EM Index. An index isn’t quite as diversified as its name implies when a handful of companies are doing this much of the heavy lifting. That’s part of why we don’t build portfolios that simply mirror the index.
A Fragile Peace
The geopolitical backdrop remains genuinely unresolved. The ceasefire and reopening of the Strait of Hormuz are real, but fragile — Iran and the U.S. only signed their memorandum of understanding in mid-June, and shipping traffic is still normalizing. We’re watching it, but we’re not making portfolio decisions based on where oil tankers are sitting this week.
Our Positioning
Our portfolios carried longer term allocations to gold and cash this quarter. That is our ballast built for a wider range of outcomes than the one that actually unfolded. In a quarter this strongly risk-on, that ballast was more of a headwind than a tailwind — which is simply the nature of insurance. You’re glad to have it when you need it, and mildly annoyed by the cost when you don’t.
In Conclusion
None of this changes the plan. Markets swing from fear to euphoria and back again faster than any headline can keep up with, which is exactly why we don’t build portfolios around headlines. We remain diversified, rules-based, and focused on what the data actually says rather than what the last six weeks felt like. As always, we wish you well for the coming quarter, and please reach out with any questions about your accounts or your broader financial picture.
If you have any questions or have experienced any changes in your financial situation please do not hesitate to Contact Me.
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