By: DOUGLAS A. RILEY, CFA, PORTFOLIO MANAGER

As we cross the midway point, 2026 is shaping up to be a bang-up year for stocks, including Real Estate, which was the second-best performing equity asset after Small Caps^[1]. Other risk assets have posted mixed returns, with Bitcoin falling more than -30%, precious metals down year to date (YTD) after a blistering start to the year, and industrial metals linked to power infrastructure (i.e., copper) higher^[1]. Oil, though still up on the year, fell sharply from mid-May through the end of June, as progress on a deal with Iran pushed prices down helping ease inflation expectations^[1]. At the same time, investors see the “New Fed” under Chairman Walsh, as leaning hawkish. At the first meeting under Walsh, the board opted to leave rates unchanged, as expected. However, both the statement and press conference were unusually brief, and forward guidance was effectively non-existent, an intentional break from the last three decades. The next Fed meeting is July 29^th and, as of July 1^st , the CME’s FedWatch shows nearly a 72% probability that the Fed Funds rate will remain unchanged at 350-375 basis points^[2]. However, the cumulative probability of a hike at the September 16^th meeting has risen to over 60%^[2].

Bonds finished June on a positive note, helped by inflation data that largely met expectations^[1]. The 10-Year treasury yield finished the month at 4.46%, up 2 basis points from the end of May^[1]. Were it not for a 10-basis point jump in yield on June 30^th on a strong JOLTS (Bureau of Labor Statistics: Job Openings and Labor Turnover Survey) report, the 10-Year yield would have shown a monthly decline^[1]. The spread on the Aggregate Bond Index rose one basis point to 26, just four basis points above the all-time time low of 22 basis points in September of 1997^[1]. The low comparative quarter to date (QTD) and YTD returns for bonds in the table reflect (1) generally rising interest rates (2) historically tight investment grade spreads and (3) strong forward earnings growth expectations favoring equities^[1]. On average, corporate bond returns are unlikely to benefit much from further tightening moving forward.

While inflation clearly accelerated in the quarter to a six-month annualized rate of 5.6%, well above the (prior) Fed’s 2% “target”, both the CPI and PCE indexes for May came in at or below the consensus view^[1]. This is especially the case for the “Core” indexes. Core CPI rose 2.9% YoY and Core PCE rose 3.4% YoY^[1]. The GDP Price Index (for Q1 2026) was up 3.6%^[1]. Pipeline inflation showed up notably in the PPI data, as the PPI Final Demand jumped 1.1% in May, well ahead of the 0.7% consensus forecast^[1]. However, PPI ex Food and Energy came in below expectations both MoM (0.4% vs 0.5% expected) and YoY (4.9% vs 5.4% expected)^[1]. The oil price shock is driving a near-term jump in prices, but that is almost entirely an energy phenomenon1.

The strong equity rally that began on March 31^st when it appeared a Cease-Fire with Iran was within reach, continued in mixed fashion through June. Small Caps led the way and were the top performing equity benchmark for the quarter as well as YTD^[1]. Large Growth had a nice second quarter but is the YTD laggard among the primary benchmarks, largely due to weakness in the Software industry group and most of the MAG7 names^[1]. Large Value has been the steadiest performer, and the YTD return is just behind the World Ex-US Index, which posted a very strong 2Q pushing YTD results near the top of the primary benchmark returns^[1]. REITS, meanwhile, have been sneaky and strong this year^[1]. Of course, the dominant equity theme remained the triumvirate of AI, data centers and power grid infrastructure. The “compute is scarce” narrative created a powerful tailwind for memory and storage stocks, essential for adding capacity as AI inference use grows rapidly.

In June, the Bloomberg 1000 Catholic Values Index (B1000) returned -0.87% while the Semiconductor industry group returned 3.05%^[1]. In the quarter, the Semiconductor group surged 52.5% and contributed 70% of the Technology sector return and 45% of the total benchmark return^[1]. Additionally, 21 out of 37 names in the group rose 50% or more and 10 were up 100%-plus^[1]. On April 1, 2026, the Semiconductor group was 13.5% of the benchmark weight^[1]. On June 30^th it was 17.5% of the benchmark, an extraordinary 400 basis point increase in just three months^[1]. To further highlight the extreme nature of the performance, the Semiconductor industry group is now 50% larger than the next biggest sector (Financials) in the benchmark^[1]. Similar periods of extreme outperformance have occurred in other groups/sectors historically (i.e., Energy in the 1970’s and Internet in the 1990’s). In each case, after peak benchmark weight was reached, the group entered a period of secular underperformance. As somebody once said, “enjoy it while it lasts.”

The signing in June of a Memorandum of Understanding (“MOU”) between the U.S. and Iran and the drop in oil prices helped shore up consumer sentiment. Specifics of the MOU seem lacking. It is basically an agreement to curtail hostilities and for the U.S. to lift the blockade and allow ships passage through the Strait of Hormuz while details of a peace deal are discussed. There have been many claims regarding an agreement and “progress on talks” over the last three months. Most statements have been misleading at best and outright false at worst. Iran very much seems to have dug in its heels to play the long game. Given the intractable nature of the conflict and how highly unpopular U.S. involvement is among the electorate, it is hard to escape the nagging feeling that the MOU is merely a tool to save face and buy time between now and the mid-term elections this Fall.

Wishing you all a happy and fun Fourth of July. Happy 250^th Birthday USA!

[1] Source: Bloomberg

[2] Source: https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html