Economic Growth Still Steady, Carried by Investment. Tariffs are Back. The build-out of artificial intelligence (AI) data centers continues to elevate business investment and profits, framing a constructive backdrop for risk assets, even at somewhat extended valuations. Job growth is improving after slumping in 2025, helping to keep consumer spending going despite very sour sentiment and slowing real wage growth. Tariffs have re-emerged, but in less extreme form.
Inflation Remains a Bit of a Thorn in the Fed’s Side. Growth has been accompanied by stickier-than-expected inflation, prompting markets to turn their attention to potential policy tightening by the Federal Reserve (Fed) later this year. Fiscal and monetary policy started 2026 in an accommodative stance, but both may be moving toward a more restrictive stance. The dual support of fiscal and monetary policy has been key to the markets’ stability since 2022, so a more hawkish tilt could slow gains in risk assets, offsetting some of the positive economic backdrop.
AI Driving Volatility in Both Directions for Stocks, But Bull is Intact. Stocks remain beholden to the AI theme. While the S&P 500 slipped for the month, the equal-weighted version gained, reflecting improving underlying breadth despite the sell-off in AI stocks. Year-to-date winners, small caps and emerging markets stocks faced the greatest volatility during the month, with the latter sliding more than 9% before clawing back a bulk of the month’s loss. Likewise, Russell 3000 growth posted its worst month versus value in 25 years.
FOMC Holds Target Range While the 30-Year Yield Nears 20-Year Highs. Three Federal Open Market Committee (FOMC) officials dissented in favor of a hike, the most in a decade, and forward guidance was expectedly removed. The 30-year yield crested 5.2%, its highest level since 2007, as the 2-year yield pulled slightly lower, steepening the curve. The persistence of this level is driven by a range of factors, including hints of increased longer-term Treasury issuance, competition for longer-dated bonds, and an erosion of faith in the Fed’s ability to get ahead of inflation.
