JUNE 2026 MARKET INSIGHTS

By: DOUGLAS A. RILEY, CFA, PORTFOLIO MANAGER

May 13^th marked one of the most consequential leadership transitions in Federal Reserve history. Kevin Warsh was confirmed as Fed Chair by the narrowest margin and took the helm on May 22^nd. Despite a history of leaning “hawkish,” many believe that Warsh is a rubber stamp for President Trump’s lower interest rate demands. That seems unlikely to prove out, at least initially with inflation pressures building. More properly understood, Warsh appears inclined to reduce the heavy hand of the Fed intervening in markets by offering less policy transparency to rebuild an air of independence. Additionally, in cooperation with Treasury Secretary Scott Bessent and with support from fellow board member Stephen Miran, monetary and fiscal policy are likely to become better aligned to promote real economic growth versus catering to Wall Street. One aspect of that approach is a desire to see the Fed’s balance sheet shrink materially. Taking the above at face value, a Warsh-led Federal Reserve could result in greater uncertainty for financial markets which, all else being equal, should mean higher volatility and lower valuations on long duration assets. The first clue might come at the next Fed meeting on June 17th.

We are now fourteen weeks into a five-week dual conflict in the Middle East with no practical solution in sight, despite near daily claims of being close to a “deal.” Technically, we are still under a Cease-Fire, though one would not know it based on the recurring attacks coming from both sides. Can a deal even be reached between the US/Israel and both Iran and Lebanon (Hezbollah)? The strait of Hormuz remains largely closed, with daily bi-directional crossings in the single digits compared to more than 100 per day prior to Feb. 28^th and Iran refusing to negotiate on the Trump administration’s highest priority, enriched uranium^[1]. Thanks to above-average inventories, floating supply, and the release of strategic reserves, oil prices eased further in May to below $90 per barrel from over $100 at the end of April^[1]. However, the impact of higher oil prices pushed YoY CPI above 3% in March and to 3.8% in April^[1].

Inflation concerns drove bond yields higher in May, with the 10-year treasury rising as high as 4.67% before easing and closing the month at 4.44%, up from 4.37% at the end of April^[1]. The short end of the curve saw a larger jump in yields as investors have fully shifted views and now see the possibility of the Fed’s next move being a rate hike versus cuts expected at the start of 2026. Corporate bond spreads were little changed in May at the tightest levels since 1997^[1]. Bond yields rose only modestly despite tightening supply chains due to the Hormuz blockade which may reflect the mixed nature of jobs data^[1]. The April Nonfarm Payrolls report showed 123k new private jobs created vs March, which brought the YoY total to +511k^[1]. However, 657k (128% of total) of the YoY increase came from the Health Care and Social Services category, meaning compared to April 2025 there was a net loss of 146k everywhere else^[1]. Finally, JOLTS (Bureau of Labor Statistics: Job Openings and Labor Turnover Survey) data released on June 2^nd showed a surge in job openings of 752k to 7.6 million with both quits and layoffs down^[1]. Also, Real Average Weekly Earnings in April (-.2%) fell for the second month in a row and were negative YoY for the first time since 2023^[1]. So, employment appears healthy on the surface, but it is reasonable to question the composition, if not the quality of job gains.

Corporate Bonds performed well in May, absorbing significant supply, especially from AI/Data Center borrowers, which helped push year-to-date returns into the black^[1]. REITS took a breather but remain one of the stronger performing equity segments YTD^[1]. Both foreign and US equities performed well in May with US large caps significantly outperforming small caps led by growth stocks, especially the Technology sector^[1]. In fact, the Technology sector was up 5.59% on a total return basis in May, contributing the entire gain for the S&P 500 Index and then some^[1]. The next best performing sector was Consumer Discretionary, up 2.60%^[1]. Further highlighting the equity market’s narrowness, the Semiconductor industry group alone contributed one-half of the benchmark return^[1]. In total, just 129 stocks (26%) outperformed the benchmark in May while 286 stocks (57%) were outright negative^[1]. Hardly the kind of stats you want to see when the market is making 11 new all-time highs. While the foregoing suggests the bull market’s foundation may be a bit shaky, earnings remain supportive. S&P 500 operating earnings are expected to grow by more than 20% this year, led by a Technology sector benefitting from the powerful tailwind of AI/Data Center related capital spending^[1].

Bloomberg Catholic Values Total Return Indices	Period Total Return
	Month %	QTD %	YTD %
Large Cap 1000 Index	5.54	16.93	11.77
Large Cap 1000 Growth	6.92	20.65	11.23
Large Cap 1000 Value	1.38	6.51	13.37
Small Cap 2000 Index	3.08	14.01	15.76
World ex-US Large & Mid Cap	5.18	16.10	15.37
Bloomberg US Aggregate Bond	0.16	0.40	0.69
US 1-3 Year US Government/Credit	0.31	0.43	0.38
US 3000 REIT Index	-0.03	9.31	13.58

There has been a lot of talk this year about equities being in a “Bubble.” There is a mountain of academic literature about them, but it seems that bubbles, much like beauty, are in the eye of the beholder. Distilling the research, I think there are a few key characteristics shared by nearly all bubbles: a major technological innovation (AI anyone?); a surge in capital spending, IPO activity and M&A to capitalize on the new technology; speculation by the public driven by optimism over the new technology; stretched valuations, rationalized based on the promise of the new technology. Finally, there must be ample liquidity and credit expansion to fuel the move higher. M2 money supply is growing at a solid clip and there is plenty of private credit, private equity and “special purpose” off-balance sheet capital available. The current environment appears to check a lot of boxes, but timing the “pop” is near impossible. Signs are accumulating that the current AI mania may be getting bubbly, but we do not see a burst on the immediate horizon. After rallying nearly 50% in two months, odds of a near-term correction in the Tech sector, and likewise the market, have risen, however^[1].

[1] Source: Bloomberg