Economic Cycle
The AI investment cycle continued to drive the economy forward in June, with first quarter GDP growth recently revised upward and corporate profits growing at an exceptional pace. That momentum was reinforced by welcome progress toward ending the war with Iran, a development that carries positive implications for both growth and inflation. The labor market remains supportive as well, with both hiring and layoffs staying low.
Despite those signs of stability and strength, consumers’ income growth has not kept pace with their spending, particularly after adjusting for inflation, and the savings rate has fallen to levels seldom seen outside of recessions, a dynamic worth watching closely. That said, a widening K-shaped dynamic defining the economy and consumer makes this a more nuanced story than the aggregate numbers alone suggest.
Equity Markets
U.S. large cap equities ended June only slightly in the red, as a strong final week pared back a sharper decline earlier in the month. That volatility reflected significant dispersion within the AI trade itself. Hyperscalers, the mega cap technology companies funding and building AI data centers, lagged meaningfully alongside software and other names viewed as vulnerable to AI driven disruption. Meanwhile, companies supplying that buildout, including memory chip makers and some industrials, posted strong gains.
U.S. large cap stocks lagged small caps, which rallied as progress toward peace in the Iran war propelled hopes for a broader cyclical recovery. International developed markets were roughly flat, while emerging markets lagged.
Fixed Income Markets
Fixed income markets posted broadly positive returns in June despite a more hawkish tone from the Fed. At his first meeting as Chair, Kevin Warsh held rates steady but dropped language pointing toward future cuts, and markets now largely expect policy rates to remain unchanged for the rest of the year, with even the possibly of a hike. Treasuries and investment grade corporates still gained modestly, as easing oil prices following the Iran ceasefire helped offset the inflation concerns a hawkish Fed might otherwise have stoked.
Municipals were the standout performer, supported by favorable technicals and continued demand for tax-exempt income, while high yield also posted a positive month even as spreads widened slightly. The market’s resilience despite the Fed pivot suggests investors are looking past the near-term policy stance toward the eventual disinflationary effect of lower energy prices.
Our Perspective
We’ve arrived at an interesting inflection point halfway through 2026. The AI trade has driven nearly every asset class meaningfully higher year-to-date, while the market has also never peaked in June, suggesting that history is on its side going into the second half. At the same time, question marks remain around the path forward for the chipmakers that have driven recent gains, as the trajectory for compute pricing – which has skyrocketed against a backdrop of soaring demand and not enough supply – is uncertain to say the least.
As a result, semiconductor companies, especially memory stocks, have gone parabolic this year, with both retail and institutional investors heavily exposed to the industry in aggregate. That kind of positioning warrants caution, although there’s little evidence of weakening near-term fundamentals. The hyperscalers, meanwhile, are trading at decade-low relative P/Es versus the S&P 500, largely due to skepticism about capex ROI. These companies didn’t get to be the most dominant in history by accident, however, and the book is yet to be written on how this investment cycle will ultimately pan out for the companies and their investors.
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Indicator Sources: Bureau of Economic Analysis (BEA) — Q1 Real GDP estimate & Core PCE (bea.gov / fred.stlouisfed.org) | Department of Labor (DOL) Jobless Claims (fred.stlouisfed.org) | Census Bureau Retail Sales (census.gov) | University of Michigan Surveys of Consumers (sca.isr.umich.edu) | ICE BofA High Yield Option-Adjusted Spread (OAS) (fred.stlouisfed.org).
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