Market Monitor – Mid Month Update

Mid-Month Update

Headlines & Highlights

• Potential peace in Middle East: The U.S. and Iran say they have agreed to a framework to end the Iran War that has disrupted global energy and commodity markets since late February. The preliminary agreement, signed by President Trump and Iranian President Masoud Pezeshkian, includes an immediate end to military action across the region, a reopening of the Strait of Hormuz by Iran, a sanctions waiver that allows Iran to sell oil right away, and the lifting of the U.S. naval blockade of Iranian ports within 30 days. With 100+ oil tankers currently anchored on either side of the strait, the prospect of a return to more normal oil flows pushed the price of crude under $75 per barrel for the first time since early March.

• Fed holds at Warsh’s first meeting: The Federal Open Market Committee (FOMC) met expectations by voting to keep short-term interest rates at the 3.5% to 3.75% range at its June meeting. The meeting was the first for Kevin Warsh in his role as Federal Reserve chair and, unlike at other meetings this year, the committee’s vote to stand pat on rates was unanimous. Meeting participants, however, signaled via their quarterly “dot plot” that the likely next move on interest rates will be higher – in March, a solid majority of the participants envisioned at least one rate cut in 2026. But accelerating inflation due to the Iran War (May’s 4.2% inflation rate was the highest in three years) and a stabilizing jobs market (an average of 188,000 new positions per month from March to May) have removed any urgency to reduce rates.

• AI, rate worries weigh on stocks: A flareup of concern about lofty AI valuations and fears of Fed rate hikes dragged down stocks in the first week of June, with the tech-focused Nasdaq market posting its worst week (-4.9%) in more than a year. Shares for most equity asset classes recovered those losses and more following news of an Iran peace deal in the works, with a key exception being U.S. large caps – the ETF representing the S&P 500 stood at -0.3% at mid-month (11.0% year to date). The month’s best performers as of June 15 were REITs (2.2% in June, 11.7% YTD) and emerging markets (2.1% in June and 27.8% YTD). U.S. small caps were up 1.6% for the month (20.0% YTD) and international developed markets have gained 0.7% in June (10.3% YTD).

Chart of Interest

Key Takeaways

• While peace prospects in Iran have brought down crude oil prices more than 30% from their early April highs,  the price of gasoline has dropped at a much slower pace – the average nationwide price of $4.00 per gallon is only about 10% lower than the peak seen in mid-May. Depleted gasoline inventories, due in large part to the war, and higher summertime demand are contributing to the slow price decline.

• Impacts from the Iran War prompted the World Bank to lower its 2026 forecast for global economic growth.  The Washington-based lending institution now expects global GDP growth of 2.5% this year, down from its January forecast of 2.6%. If accurate, it would be the weakest global rate in a non-pandemic year since 1991. The World Bank held its U.S. GDP growth forecast steady at 2.2%. 

• The Fed’s outlook on interest rates was quickly digested by market participants – after yesterday’s Fed announcement, futures activity as measured by the CME Group’s FedWatch tool suggested a likelihood of at least one rate increase before year-end and close to a 50% chance of two or more hikes. Our base case is that   short-term rates will stay flat at 3.5% to 3.75% into 2027 as falling energy prices relieve inflationary pressures. 

• The much-anticipated IPO for SpaceX on June 12 reflected enduring investor excitement about all things AI – much of the company’s soaring valuation is based on its vision for establishing data centers in space. After four days of trading, SpaceX shares were up 42% from the IPO price and its market cap of roughly $2.5 trillion would rank it sixth among companies in the S&P 500.   

• Second-quarter earnings growth expectations for the S&P 500 continue to climb, mostly due to a rosier outlook for several leading tech companies. According to the latest numbers from the financial data firm FactSet, Q2 earnings are forecast to be 22% higher than the same quarter of 2025. It would be the second straight quarter of 20+% year-over-year earnings growth and the seventh straight quarter of double-digit gains.

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