In Short

• June's equity rally stalled as energy-driven inflation, strong payrolls and stretched tech valuations prompted the Fed to hold at 3.50 – 3.75% with no cuts expected through year-end.
• Europe's outlook has weakened as the ECB hiked into slowing growth, earnings revisions are muted, and the fiscal/defense impulse is slower to transmit, driving a downgrade to underweight equities and maintaining overweight fixed income stance.
• Our positioning stays selectively risk-on with global equities overweight on AI capex and earnings, fixed income favored at the short end, and hedged strategies upgraded as traditional diversification proves less effective.

The Month in Markets

Following the strength of equity returns in April and May, June delivered a wakeup call to equity investors that there are risks to the rosy narrative. Economic strength, a still engaged consumer, a revival of AI exuberance and a further step towards resolution in the Middle East should have acted as the foundation for a continuation of the rally. However, the knock-on effects of several months of higher energy prices, three straight stronger-than-expected U.S. payrolls reports, and an acknowledgment that certain pockets of the tech sector might have moved a little too far, too fast brought U.S. growth stocks back to earth.

The Federal Reserve's June meeting did little to lighten the mood. The Fed set a decidedly hawkish tone under new Chair Kevin Warsh, who held rates steady at 3.50 – 3.75% while making clear that price stability remains the overriding priority—a posture fully supported by the data. May nonfarm payrolls came in at 176,000 against expectations of 88,000, for the third consecutive upside surprise, while headline CPI hit +4.2% year-over-year—its highest reading since 2023—driven almost entirely by energy prices, up +23.5% on the year. The updated dot plot shifted accordingly, with the median 2026 rate projection moving to 3.75% and core PCE revised up to +3.3%. As a result, we expect the Fed to remain on hold through year-end—certainly not the best outlook for long-duration growth stocks looking for a leg to stand on.

The S&P 500 responded to this confluence of events with a decline of -0.95% for the month of June. However, this does not fully reflect the rotation that took hold in the month, as the Nasdaq fell by -2.75%, while the Russell 1000 Value gained 2.27%. U.S. small-cap equities, too, performed well on the month, as the move out of technology benefited more cyclical areas of the market. Outside of the U.S., returns were mixed, with Japanese equities performing well while the weakness in U.S. tech spilled into other Asian markets.

Interestingly, despite the hype, the pressure on tech came on the back of the SpaceX IPO, which, when combined with Anthropic and OpenAI later this year or early next, could collectively come to the market at an aggregate valuation exceeding $3 trillion. The portfolio shifts necessary to potentially incorporate these names into existing portfolios could drive further weakness in widely held, concentrated tech names; conversely, if further questions arise around the lofty expectations being set for AI companies, and that translates into volatility, we could see a shift in the timeline for these offerings. The overarching argument for stocks remains broad earnings strength, however, and with second quarter earnings season just around the corner, investors could find solace in the results.

Bond markets reflected these challenges as well. The 10-year Treasury yield touched 4.53% following the May jobs report before easing back to 4.47% by month-end—a modest rally on strong demand. The front end stayed firm, with the two-year yield holding near 4.17% as rate hike probability, according to CME Fedwatch, reflects a 30% chance for a hike in July and a 70% hike by September. Investment grade corporate spreads are at exceptionally tight levels relative to history, with U.S. IG yields hovering near 5.2%—most of that driven by duration. U.S. high yield, which outperformed on the month, returning 0.27%, was driven by carry as spreads tightened. Finally, commodities were down sharply for June, as the announcement of a memorandum of understanding between the U.S. and Iran to open the Strait of Hormuz translated to a sharp drop in oil prices.

Europe Offsides Even as Middle East Simmers

2025 was a year in which investors were rewarded for diversifying global equity allocations and benefiting from strong returns in European equities. Evidence of stronger economic growth, a more accommodative monetary stance and an acceleration of fiscal spend was the foundation for improved investor sentiment, and performance was strong in response, with the MSCI Europe index up over +36% for the year. Coming into 2026, however, the sustainability of strong equity performance came into question.

The dominant economic force of 2026 is the AI capital expenditure supercycle, and it is overwhelmingly a U.S.-centric story. The buildout has moved well beyond hyperscalers into utilities, industrials and semiconductor supply chains—sectors where Europe is either underexposed or has not shifted production to this new phase of the industrial cycle. In addition, Europe lacks the pronounced tailwind of the AI equity wealth effect, which has cushioned the impact of inflation in the U.S., creating only a muted decline in consumer spending. With European economies much more reliant on imported energy supplies, the European consumer is meaningfully more exposed to supply-shock inflation impacts.

Then we have the central bank issue. Eurozone inflation is expected to end the second quarter at +3.1%, before moderating to +2.8% in the third quarter—still meaningfully above the +2.0% target. The European Central Bank, with its single mandate of price stability, raised rates in June in response to higher energy prices and fears of further price pressures. European consumers are not only more exposed to energy import prices, but they also have greater exposure to interest rates, as essentially all consumer debt in Europe is floating rate. Coupling this more restrictive stance with already slower growth expectations of +0.8 – 1.1% growth for the Eurozone versus +2.2 – 2.4% for the United States in 2026, it is hard to see a scenario in which sentiment would improve based on broader economic conditions.

Apart from the economy, there is the earnings story. The strengthening earnings narrative, which has justified the rally in equities in the first half of 2026, comes into question for European companies. While U.S. stocks have enjoyed meaningful upward earnings revisions this year, the overhangs referenced above have translated into more muted revisions for European names. Granted, a key factor has been the relative energy independence the U.S. enjoys—revisions have been muted in China as well, given their reliance on imports. Therefore, while European stocks continue to look attractive from a valuation standpoint, the lack of exposure to broader global economic momentum creates a hurdle to unlocking that differential.

Finally, questions are emerging around fiscal spending—a catalyst for last year’s strong returns. The reality is that fiscal tightening is happening across the European bloc, apart from defense. Admittedly, military outlays have accelerated by approximately 75% since 2021 in response to changing dynamics tied to the U.S. and NATO, as well as the Russian invasion of Ukraine. This story is most evident in Germany, where the removal of the constitutional debt brake last year has resulted in expectations of a steady increasing debt-to-GDP ratio through 2028—even more pronounced should the economy slow further. However, that fiscal impulse has been slower to transmit to economic growth than previously modeled, and the shifting political climate in the member states as well as in the U.K. has resulted in questions as to how impactful this defense-focused increase in spending could be.

In short, the European story is complex. As such, we have become less constructive on European equities, while maintaining our overweight of European fixed income given our view that the ECB's recent rate hike is increasingly looking like a one-and-done event. However, we acknowledge that, should the planned fiscal spending prove more stimulative than anticipated, there could be an inflection higher for growth, which could potentially shift our view on both equities and fixed income as we push into 2027.

Portfolio Implications

Equities. We remain overweight global equities, driven by the AI capital expenditure cycle, strong earnings, and a nascent manufacturing recovery gaining momentum into year-end. We downgraded Europe to underweight on energy vulnerability and slowing growth, while India moved to neutral given rising real rates and weakening foreign flows. Japan, China and broader emerging markets stay at overweight, as structural reform, AI momentum and a weaker dollar remain tailwinds.

Fixed Income. Rising real rates, not inflation, are the dominant force in fixed income. We are at-target to U.S. Treasuries, with a preference for the short end of the yield curve. Credit fundamentals are intact, and we are constructive on U.S. investment grade and high yield corporates despite tight spreads. Outside of the U.S., we maintained our overweight of European fixed income due to slowing growth, while emerging market debt has become more attractive.

Private Markets. Private equity and credit remain at target weight, with secondaries and co-investments offering compelling entry points given the continued need for liquidity. Commodities are at a modest overweight as a diversifier and inflation buffer, with El Niño introducing additional potential upside in agricultural commodities. We upgraded hedged strategies to overweight, favoring absolute-return and macro approaches as traditional equity-bond diversification proves less effective.

Index Returns as of June 2026

Source: Bloomberg, Total returns as of June 30th,2026. S&P 500 Index is represented by S&P 500 Total Return Index. Nasdaq Composite NASDAQ-Composite Total Return Index. Dow Jones is represented by Dow Jones Industrial Average TR. Large Cap is represented by Russell 1000 Total Return Index. Mid Cap is represented by Russell Midcap Index Total Return. Small Cap is represented by Russell 2000 Total Return Index. All Cap is represented by Russell 3000 Total Return Index. Large Cap Growth is represented by Russell 1000 Growth Total Return. Large Cap Value is represented by Russell 1000 Value Index Total Return. Small Cap Growth is represented by Russell 2000 Growth Total Return. Small Cap Value is represented by Russell 2000 Value Total Return. ACWI is represented by MSCI ACWI Net Total Return USD Index. ACWI ex US is represented by MSCI ACWI ex USA Net Total Return USD Index. DM Non-U.S. Equities is represented by MSCI Daily TR Gross EAFE USD. EM Equities is represented by MSCI Daily TR Gross EM USD. Cash is represented by ICE BofA US 3-Month Treasury Bill Index. U.S. Aggregate is represented by Bloomberg US Agg Total Return Value Unhedged USD. Munis is represented by Bloomberg Municipal Bond Index Total Return Index Value Unhedged USD. Munis Short Duration is represented by Bloomberg Municipal Bond: Muni Short (1-5) Total Return Unhedged USD. Munis Intermediate Duration is represented by Bloomberg Municipal Bond: Muni Intermediate (5-10) TR Unhedged USD. Investment Grade is represented by Bloomberg US Corporate Total Return Value Unhedged USD. High Yield is represented by Bloomberg US High Yield BB/B 2% Issuer Cap Total Return Index Value Unhedged USD. Short Duration is represented by Bloomberg US Agg 1-3 Year Total Return Value Unhedged USD. Long Duration is represented by Bloomberg US Agg 10+ Year Total Return Value Unhedged USD. Global Aggregate is represented by Bloomberg Global-Aggregate Total Return Index Value Unhedged USD. EMD Corporates is represented by J.P. Morgan Corporate EMBI Diversified Composite Index Level. EMD Sovereigns – USD is represented by J.P. Morgan EMBI Global Diversified Composite. Commodities is represented by Bloomberg Commodity Index Total Return. Commodities ex Energy is represented by Bloomberg Ex-Energy Subindex Total Return. U.S. 10-Year Yield is represented by US Generic Govt 10 Yr.