June 2026 Market Commentary

June 16, 2026

• Peace deal between the US and Iran remains elusive.
• AI trade drives markets to new highs.
• Kevin Warsh confirmed as the next Chair of the Federal Reserve.
• May Returns: S&P 500 5.2%. Bloomberg US Aggregate Bond index 0.3%.

May had a certain “stop me if you’ve heard this one before” quality to it as Middle East headlines swung repeatedly from suggesting a peace deal was close at hand, to announcing negotiations were stalled with no deal in sight. Though energy markets continued to react to the headlines, and fixed income yields rose on concerns of elevated inflation, equity markets seemingly moved on (and higher), propelled by the assumption that a peace deal will eventually occur, and renewed enthusiasm for all things AI-related. May also marked a changing of the guard at the Federal Reserve as Jay Powell’s term as Fed Chair ended and Kevin Warsh’s began.

Events in the Middle East settled into a now familiar pattern in May. At multiple times throughout the month headlines suggested a peace deal was close at hand, only to see negotiations stall as one or both sides appeared unwilling to meet the demands of the other. On the ground, the situation remained relatively static as the US continued its blockade of Iranian ports, while Iran used the threat of attack to prevent vessels from transiting the Strait of Hormuz. Oil prices remained elevated, relative to pre-war levels, but moderated from above $100 at the start of the month to ~$90 at the end of the month. That in turn helped relieve pressure on US gasoline prices, which saw the average cost of unleaded gasoline fall from a peak of $4.56/gallon in mid-May, to $4.34 by the end of the month.

As energy traders remained focused on, and nervous about, developments in the Middle East, broader equity markets appeared to take a more sanguine view of the ultimate outcome. Strong first quarter earnings reports, and a seemingly insatiable demand for all things AI, helped propel markets higher, building on April’s gains. On a consolidated basis, S&P 500 first quarter earnings grew nearly 29% from a year ago, led by a 63% increase in Mag 7 earnings. Excluding the Mag 7, earnings growth was still a very strong 17%.

Market enthusiasm for AI-related stocks seemingly reached a fever pitch as Mag 7 companies and others reported continued strong demand for products and services related to the ongoing AI buildout, from computer chips and the development of data centers, to the energy needed to power data centers and the end use application of AI technologies. Reflecting the exuberance surrounding AI-related stocks, the tech-heavy NASDAQ gained 8.4% in May, pushing its two-month return to 25%, its largest such gain since 2002.

Other asset classes also enjoyed strong positive returns. Within domestic markets, large caps (S&P 500) gained 5.3%, while small caps (Russell 2000) rose 4.3%. International markets also enjoyed positive returns with developed markets (MSCI EAFE) gaining 2.6%, while emerging markets (MSCI EM) jumped 9.5%.

Several large notable AI or AI-related companies announced initial public offerings (IPOs) including SpaceX, Anthropic (maker of AI agent Claude), and Open AI (maker of AI agent Chat GPT). The announcements added to investors’ AI enthusiasm. Reflecting an ongoing trend in which companies wait longer, and become larger, before going public, the estimated proceeds of the three IPOs, according to Forbes, is expected to be ~$200B. If realized, that would be just shy of the $265B in proceeds of all 2,749 companies that went public between 1995-2000 during the height of the tech bubble.

Economic data for the month supported investors’ generally optimistic outlook. According to industry group Institute for Supply Management (ISM), activity in both the manufacturing and services sectors accelerated in May, with manufacturing reaching a four-year high, while services reached a three-month high. New orders in both sectors accelerated, suggesting increased demand. Notably, however, both sectors saw continued declines in employment. That trend could reverse in the coming months should demand continue to improve, thereby giving businesses the confidence to hire in order to meet the demand. Input prices for both sectors remained elevated, impacted by higher energy prices, stemming from events in the Middle East.

After a very sluggish 2025, labor markets continued to improve in May, with nonfarm payrolls adding 172K jobs during the month, twice the expected 85K. In addition, the prior two months were revised higher by a combined 93K, bringing the three-month total to 565K, the best three-month stretch since 1Q24. Unemployment and labor force participation rates remained unchanged at 4.3% and 61.8%, respectively. In another sign of improving labor market conditions, job openings increased in April by over 700K to 7.62M, the highest level since November 2024, suggesting renewed business confidence.

As expected, inflation continued to see upward pressure due to events in the Middle East. On a headline basis, consumer prices (CPI) rose 0.5% in May and 4.2% from a year ago, the highest level since April 2023. Higher energy prices were the main driver, increasing 3.9% in May, accounting for 60% of the overall increase in headline CPI. Compared to a year ago, energy prices jumped 23.5%, with gasoline prices up 40.5%.

Excluding food and energy prices, core CPI rose 0.2% for the month and 2.9% from a year ago, suggesting the impacts of higher energy prices remain relatively well contained. Nonetheless, concerns persist that an extended period of elevated energy prices could result in higher prices for a broader range of goods and services.

The recent acceleration in inflation puts the Federal Reserve and its new Chair, Kevin Warsh, in a difficult position. Earlier in his career Warsh was viewed as a fiscal hawk—supportive of the Fed maintaining higher interest rates to keep inflation under control. He was also openly critical of the Fed in the years following the Great Financial Crisis (GFC), arguing its quantitative easing (QE) program, i.e. buying bonds to suppress yields and support economic activity, would lead to economic distortions including inflated asset prices.

More recently, Warsh has shifted his tone, becoming open to the idea of the Fed lowering rates to support economic growth. In doing so, he has argued that new AI technologies could lead to higher productivity without triggering higher inflation. However, against the current backdrop of improving labor market conditions, and surging headline inflation, the Fed, and Warsh, may be forced to raise rates, not lower them, to prevent the economy from overheating.

Such a move would have seemed improbable at the beginning of the year when markets were pricing in 2+ Fed rate cuts by the end of the year. However, following the release of May employment and inflation data, markets are now pricing in a 70% chance of at least one rate hike prior to year end.

Fixed income markets responded aggressively in May to global inflation data resulting in heightened volatility, as yields moved higher through the first half of the month before reversing course to end the month relatively unchanged. As a result, bond markets produced modest returns with the Bloomberg US Aggregate Bond index, the broadest measure of the US bond market, rising 0.3% in May.

Yields peaked in mid-May with the 30-Year Treasury yield hitting 5.18%, its highest level since 2007, as multiple firms including Goldman Sachs and Bank of America pulled their forecasts for rate cuts in 2026. While the rise in yields and decreased expectations for additional rate cuts in 2026 was generally attributed to the ongoing conflict in Iran and its impact on trade and energy prices, there was some speculation that the spike in yields was a signal to incoming Fed Chair Warsh that he can’t be on a pre-determined path of rate cuts.

Higher yields extended well beyond the US—Japan’s 30-year yield surged to its highest level since the tenor’s 1999 debut, and UK 30-year gilt yields remained near 5.64%, the highest of any major developed market. In the US, the rise in yields proved temporary as they reversed course in the second half of the month leaving the 30-year Treasury at 4.96%, just 0.01% higher than where it began the month.

The municipal bond market navigated the month’s yield volatility with resilience as strong demand, bolstered by attractive valuations, supported pricing. While Treasury yields ended the month 0.01%-0.15% higher, municipal bond yields fell by as much as 0.14%, primarily at the longer end of the curve, reflecting healthy demand.

May saw continued inflows into muni funds and municipal supply remained robust—driving its second strongest pace on record for inflows and its strongest issuance on record. For investors, that means that even in a cheapening market environment, the demand and the sentiment for municipal debt remains high, buoying its performance.

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