June 2026 Market Update
Tug of War(sh)
AI-driven markets push to new highs. Inflation re-accelerates on an energy shock. A new Fed Chair signals rate hikes but quietly watches for an oil-price lifeline. June 2026 in a sentence: everyone is waiting to see which force blinks first.
EXECUTIVE SUMMARY & POSITIONING
Federal Reserve Chair Kevin Warsh finds himself caught between two of the most powerful forces in markets: an AI-driven investment boom that is lifting growth, earnings, and equity markets to record highs, and an energy-shock-driven inflation re-acceleration that is demanding a policy response. His answer so far has been to signal rate hikes firmly enough to maintain credibility without pulling the trigger. He is buying time, watching for falling oil prices to deliver the softer inflation readings that would render those hikes unnecessary. Brent has already dropped sharply from its conflict highs as the Strait of Hormuz reopened, giving him at least a plausible path to that outcome. June’s market action was, in many ways, a reflection of that same waiting game.
Equities extended their record run, but leadership broadened meaningfully away from mega-cap tech, with the Dow setting a fresh record near 52,000 and the Russell 2000 breaking 3,000 for the first time, even as the Nasdaq stalled on AI-financing concerns. Q1 earnings were the strongest in years (84% beat rate, record net margins), payrolls have outpaced consensus for three straight months, and the underlying economy, though two-speed, continues to grow. Against that backdrop, we remain constructively positioned. But the tug of war between the AI-led growth impulse and the inflation and policy response it is enabling is the dominant tension for the second half of 2026, and the outcome is far from settled. A fresh U.S.-Iran flare-up in the final days of the month was a reminder that the oil-price lifeline Warsh is quietly counting on is not guaranteed.
On positioning, we are executing our quarterly rebalancing back to target benchmark weights. The second quarter delivered strong returns across virtually all asset classes, with equities rebounding sharply from the geopolitical-risk-driven dip in March and extending gains through most of June, leaving many portfolios running meaningfully ahead of their strategic targets. As part of our disciplined quarterly process, we are trimming a portion of those equity gains and rotating proceeds into fixed income, both to lock in profits generated during the quarter and to take advantage of yields that remain more attractive than they have been in prior cycles. This is scheduled, process-driven rebalancing rather than a change in our underlying market view, and the timing is reinforced by the rising bar heading into Q2 earnings season (discussed below), making it a prudent moment to resize positions before results begin in mid-July.
7,354
S&P 500 (6/26 close)
4.2%
CPI YoY, May
4.3%
Unemployment Rate, May
2.1%
Real GDP, Q1 (third estimate)
The economy is increasingly carried by one engine, AI-related capital spending, estimated to have driven roughly three-quarters of Q1 GDP growth while consumer spending growth slowed to a crawl. That concentration is both the market’s biggest opportunity and its biggest single point of fragility.
Economic Indicators
A Two-Speed Economy: Overheating or Softening?
Is the economy overheating or softening? Our answer is both, in different parts of it. The capital-spending side looks overheated: ISM PMIs are accelerating above 54, inflation is running well above target (CPI 4.2%, core PCE 3.4%, PPI 6.5% YoY), and margins are at a record high, even as the Fed pivots toward hikes. The household side looks softer: real consumer spending grew just 0.5% annualized in Q1, the LEI remains negative on a six- and twelve-month basis, and wages (3.4% YoY) trail inflation. AI capital spending is the connective tissue, but precision matters here: the Magnificent 7 themselves are down roughly 5% year to date and have lagged the S&P 500, while semiconductor and infrastructure names (SOXX is up roughly 90% in H1) have captured most of the AI-related equity return, and the hyperscalers are increasingly funding the buildout out of deteriorating free cash flow rather than surplus profit, a point we expand on in Earnings Growth below.
Inflation: CPI, PCE & PPI
Inflation re-accelerated in May as Iran-related energy costs worked through the pipeline. CPI rose 4.2% year over year (highest since 2022), core CPI held at 2.9%, and core PCE, the Fed’s preferred gauge, accelerated to 3.4% (highest since October 2023). PPI for final demand jumped to 6.5% YoY, with nearly 80% of the increase traced to energy and gasoline.
PMI: Manufacturing & Services
Both ISM surveys point to a re-accelerating economy. Manufacturing PMI rose to 54.0 in May, its highest since 2022, while Services PMI registered 54.5, a 23rd straight month of expansion. Price pressures remain a common thread in both surveys, consistent with the inflation data above.
Consumer Sentiment
The University of Michigan’s Consumer Sentiment Index fell to an all-time low of 44.8 in May before rebounding to 49.5 in June, still the second-lowest reading in the survey’s history, as easing gasoline prices lifted the outlook. Year-ahead inflation expectations eased to 4.6% from 4.8%, still well above February’s pre-conflict 3.4%. The gap between this weak reading and a record-setting market is real but explainable: equity and AI-driven gains have been concentrated in a narrow slice of wealthier households, while the energy-driven inflation spike is the kind of cost households feel most directly, and wage growth has trailed it. We read this as a distributional story, not a sign the labor market or aggregate growth is deteriorating.
Leading Economic Index (LEI)
The Conference Board’s LEI rose 0.1% in May to 99.3, a second straight monthly gain driven entirely by financial components (stock prices and the interest rate spread), with consumer expectations remaining a drag. We continue to include the LEI as a widely-watched series, but flag that its signal has been notably unreliable this cycle, in a downtrend since early 2022 without the recession it has historically anticipated, and we weight it accordingly: one input among many rather than a standalone signal.
Employment
The labor market has outperformed for three straight months. Nonfarm payrolls rose 172,000 in May, well above the 80,000 consensus, with prior months revised up a combined 93,000. Unemployment held at 4.3%, and wage growth (3.4% YoY) continued to trail inflation.
GDP
The BEA’s final Q1 estimate put real GDP growth at 2.1% annualized, revised up on a smaller import drag. AI-related investment is estimated to have contributed roughly three-quarters of that growth, while consumer spending contributed little and residential investment fell for a fifth straight quarter.
Global Economic Snapshot
Outside the U.S., growth is holding up but uneven, with the energy shock weighing more on importers than exporters.
| Economy | 2026E Real GDP Growth | 2026E Inflation | Notes |
|---|---|---|---|
| United States | ~2.6% | ~3.2% | AI capex-led; Q1 actual 2.1% |
| Euro Area | ~1.3–1.5% | peaking ~3.4% (Q3/Q4) | Energy pass-through pressuring HICP |
| Japan | ~0.8% | ~2.2% | Domestic demand-led |
| United Kingdom | declining vs. 2025 | elevated | Energy-sensitive |
| China | ~4.8% | subdued | Export strength offsetting soft demand |
| India | resilient, above-trend | moderate | Least energy-shock sensitive major |
| Brazil | moderate | moderate | Net beneficiary of oil prices |
| Emerging Asia (ASEAN+) | ~4.7% (ADB) | moderating, 2.8%+ in 2026 | Indonesia, Vietnam, Philippines leading; tech exports cushioning trade headwinds |
2026 estimates per IMF April 2026 World Economic Outlook, Asian Development Bank April 2026 Outlook, ECB, Goldman Sachs Global Economics, and McKinsey Southeast Asia Quarterly Review (Q1 2026); cross-checked against AMRO ASEAN+3 Regional Economic Outlook 2026. Sell-side and official-sector consensus, not Madison Partners’ own projections.
Global Asset Class Performance
Risk assets have had a strong first half, led by emerging market equities and U.S. small caps, with fixed income broadly flat to modestly positive. Commodities are up sharply on the energy shock, even as oil has given back much of its war premium.
Within fixed income, Treasuries are essentially flat (+0.2% YTD) as the 10-year yield has held a 4.4%–4.6% range. Gold has pulled back to roughly $4,040–$4,050/oz, down for a fourth straight week, as markets price a more hawkish Fed under Chair Warsh.
Earnings Growth
Q1 was the strongest earnings season in years: 84% of S&P 500 companies beat consensus EPS, above both the five- and ten-year averages, extending the streak of double-digit growth to a sixth straight quarter, with net margins at a record high.
That headline strength masks a more nuanced story at the Magnificent 7. Alphabet’s Q1 free cash flow fell 47% YoY to roughly $10.1 billion, and Amazon’s trailing free cash flow has collapsed about 95% to roughly $1.2 billion, with Street estimates now projecting outright negative free cash flow for Amazon in 2026. Meta’s free cash flow margin fell over 4 points, and some analysts model negative free cash flow for Meta in 2027 and 2028. Combined hyperscaler capex is approaching $700 billion for 2026, consuming nearly all operating cash flow versus a roughly 40% historical average. The market is rewarding AI spending tied to demonstrated, monetizing demand (cloud revenue, backlog) and increasingly questioning spending without visible return, which is the real story behind two open questions: how long this spending continues (guidance points to at least 2027) and when the market gets clarity on its return (we doubt Q2 earnings resolves this).
The Q2 2026 consensus estimate has been revised up to 23.1% YoY EPS growth, from 18.8% at the start of the quarter, a meaningfully higher and unusually upward-revised bar. We see strong Q1 earnings as the strongest pillar under current valuations, and the higher Q2 bar as the thing most worth watching for signs of fatigue.
Global Equity Valuations
| Market | Forward P/E | vs. 5-Yr Avg | vs. 10-Yr Avg |
|---|---|---|---|
| S&P 500 | ~21.0x | Above (19.9x) | Above (18.9x) |
| Russell 2000 | ~26.1x | Above | Above |
| MSCI EAFE | ~15.5x | Roughly in line | Below long-run premium markets |
| MSCI Emerging Markets | ~12.2x | Below developed markets | Discount intact |
The S&P 500’s forward multiple of roughly 21 times is above both its five- and ten-year averages, leaving less room for error than six months ago. We see that premium as earned, for now, by realized earnings and margins, but any deceleration in the back half of 2026 would likely be less forgiving from this starting point. International developed and emerging market equities continue to trade at a meaningful discount, which we believe justifies a deliberate non-U.S. allocation even as the U.S. leads on momentum.
Valuation multiples per FactSet Earnings Insight (S&P 500) and Wespath/FactSet weekly market summary (Russell 2000, MSCI EAFE, MSCI EM), as of mid-to-late June 2026.
Investor Sentiment
Individual investor sentiment has turned more constructive. The AAII bull-bear spread moved back above its long-run average, with bullish sentiment at 44.9% versus a 37.5% historical average, the first time above average in six weeks. The VIX closed June near 16.4, below its long-run average, consistent with a market that has not priced in meaningful near-term distress.
Investor Positioning
Active manager positioning has moved decisively bullish. The NAAIM Exposure Index climbed to 98.6, up from 92.8 the prior week and firmly in bullish territory (readings above 80 denote heavily invested managers). That conviction is consistent with a market making new highs, but it also leaves less incremental buying power in reserve if sentiment turns. We will update margin debt and options positioning once FINRA and CBOE publish current data.
Recap: Notable Events & Market Impact
- Inflation re-accelerated. May CPI, core PCE, and PPI all surprised to the upside on Iran-related energy costs, prompting the Fed to drop a signaled rate cut and open the door to a hike.
- The Fed turned hawkish under new leadership. Chair Kevin Warsh reaffirmed the inflation-fighting mandate; futures now price roughly three 2026 hikes, a sharp reversal from the cutting cycle expected entering the year.
- Leadership broadened away from mega-cap tech. The S&P 500 and Nasdaq stalled into month-end on AI-financing concerns and Apple/Microsoft price increases, while the Dow set a fresh record near 52,000 and the Russell 2000 broke 3,000 for the first time, a rotation we view as constructive for the rally’s durability.
- The Strait of Hormuz reopened, then came under renewed strain. A ceasefire extension drove oil sharply lower (Brent to roughly $73.74/bbl) before fresh strikes on U.S. positions in Kuwait and Bahrain reintroduced uncertainty just as talks were set to resume in Doha.
Looking Forward
What We Are Watching
- June jobs (July 2) and June CPI (July 14) will be the key tests of whether May’s inflation re-acceleration was a one-month story or a durable trend, and will shape whether the Fed holds or hikes next.
- The Strait of Hormuz and the Doha talks. The strait’s reopening drove most of the recent disinflation and risk appetite; its durability is now genuinely in question after the late-June exchange of strikes.
- The Q2 earnings bar, and the Magnificent 7 specifically. Consensus now calls for 23.1% YoY EPS growth, up from 18.8% at the start of the quarter, an unusually high and upwardly-revised bar. With the Magnificent 7 down roughly 5% YTD and free cash flow deteriorating sharply at Alphabet, Amazon and Meta against nearly $700 billion in 2026 hyperscaler capex, the key questions are how long this spending continues and when its return becomes visible. We do not expect Q2 to resolve either, and a disappointing reaction to high-profile reports could trigger a sharper drawdown than seen so far this year, which is one reason we are staying disciplined about the rebalancing already underway.
- The Fed’s reaction function under Chair Warsh. Markets are pricing a meaningfully more hawkish path than six months ago, and the risk of a policy error has risen alongside the stakes.
Structural Trends, Opportunities & Threats
The structural bull case rests on a genuinely productive investment cycle: AI capital spending is showing up in real GDP, earnings, and record margins, not just multiples. The corresponding risk is concentration, an economy and earnings base this dependent on one theme is more vulnerable to a shock to that theme, and the energy shock of the past four months is a reminder that exogenous risks have not gone away. For diversified portfolios, we favor holding AI-and-momentum leadership alongside deliberate, valuation-aware exposure to international equities and higher-quality fixed income, and view potential corrections as opportunities to add to long-term positions rather than reasons to retreat.
As always, we welcome the opportunity to discuss how these themes apply to your specific portfolio and objectives.
Altug Dincturk, CFA
Chief Investment Officer
Madison Partners
This material is for informational purposes only and does not constitute investment, legal, or tax advice, nor an offer or solicitation to buy or sell any security. Data sourced from BLS, BEA, the Federal Reserve, the Conference Board, the Institute for Supply Management, the University of Michigan, CFTC, AAII, FactSet, and Bloomberg, and is believed but not warranted to be accurate as of the dates indicated. Past performance is not indicative of future results. © 2026 Madison Partners. All rights reserved.
