June Market Commentary | A Record Quarter on a Narrow Base

Nicola Wealth Market View

June capped a strong quarter for equity markets, with the S&P 500 and NASDAQ 100 posting their best quarterly gains since 2020. However, beneath the headline returns, the nature of the rally is shifting. Earnings growth, rather than valuation expansion, has been the primary driver, but the strength remains concentrated among a relatively small group of AI-related companies. Encouragingly, leadership is broadening toward businesses benefiting from AI investment, industrials, and higher capital spending. 

The economic backdrop remains resilient, with growth reaccelerating and recession risks declining. However, investors face a more complex environment. Bond markets are signaling that interest rates may remain higher for longer, inflation pressures extend beyond energy, and consumers are showing early signs of strain. Oil prices have reversed sharply but remain a source of uncertainty. 

We believe this environment reinforces the importance of a disciplined, diversified approach. While AI investment and strong corporate earnings continue to support markets, concentration risks, valuations, and shifting macro conditions highlight the value of balanced portfolios built for a range of outcomes. 

Key takeaways

• Equity markets delivered strong returns, but leadership remains concentrated around AI-related companies  
• Earnings growth, not valuation expansion, has been the main driver of gains  
• Growth remains resilient, but inflation and higher-for-longer rates remain key risks  
• Market leadership is broadening beyond the largest technology companies  
• Diversification remains critical as markets navigate shifting economic and policy conditions 

Below is Chief Economist Rob Edel's Market Commentary, offering a more in-depth look at the forces shaping markets in June.

U.S. equities surge, but leadership narrows  

U.S. equities finished June with their strongest quarterly gain since 2020. According to Bloomberg, the S&P 500 and the technology-heavy NASDAQ 100 recorded their best quarter since June 2020, with the S&P 500 gaining 15.2% (total return, US$) and the NASDAQ 100 up 27.7% (total return, US$). Improving geopolitical conditions and continued enthusiasm for artificial intelligence (AI) helped drive returns higher. The S&P/TSX Composite, which gained 7.0% (total return, C$) also participated in the rally, supported by strength in energy and materials sectors.

Beneath the strong headline returns, however, the character of the rally shifted as the quarter progressed. In June alone, the S&P 500 declined nearly 1.0%, and the NASDAQ 100 fell 2.7%, with much of the weakness concentrated among the Magnificent 7.

At the same time, market leadership broadened beyond the largest technology companies. Investors increasingly rotated toward businesses supporting the AI buildout—including semiconductor manufacturers and capital equipment providers—even as questions emerged around the durability of growth among some of the market's biggest winners.

Adding to the shift in sentiment was the growing likelihood of further Federal Reserve tightening, which supported the US dollar and weighed on risk assets. Gold suffered its worst quarter in more than a decade, and the Japanese yen fell to a 40-year low.

The second quarter marked a strong period for equity markets, with major indices posting notable gains. However, the durability of the rally will depend in part on whether earnings growth broadens beyond a relatively small group of AI-related companies and whether higher interest rates begin to challenge those expectations.

The remainder of this commentary explores these themes in greater detail.

Earnings, not valuations, are doing the work

One of the more encouraging features of this market is that earnings growth, rather than expanding valuations, has been driving returns. Strategas notes that multiple expansions have been virtually non-existent this year, with the market’s gains largely reflecting stronger corporate earnings rather than higher valuations. That provides a healthier foundation than a rally driven primarily by investor sentiment.

The underlying numbers are striking: according to the Wall Street Journal, S&P 500 profit margins reached a record of 14.8% in the first quarter of 2026, up from 12.9% a year earlier and well above the five-year average of 12.3%.

The earnings outlook also remains constructive. According to Goldman Sachs, analysts expect the median S&P 500 company to deliver 9% earnings-per-share (EPS) growth in the second quarter. However, the cap-weighted S&P 500 index is expected to post EPS growth of more than 20%, marking the second consecutive quarter of growth above 20%.

The earnings picture remains encouraging, but two important caveats warrant attention.

First, the strength is narrow. Excluding the technology sector, the record 14.8% margin falls to roughly 12.4%, and Apollo observes that return on investment outside the Magnificent 7 has been largely stagnant.

Second, a large wave of depreciation tied to the AI build-out is coming, and the Wall Street Journal flags it as a future drag on reported earnings. A broad earnings recovery is generally more durable than one concentrated in a small number of market leaders.

Market leadership continues to evolve

One of the more notable developments in June was the extent to which market leadership shifted, even as major indices continued to reach new highs. Over the past twelve months, the Magnificent 7 have collectively performed in line with the average S&P 500 stock, while declining nearly 9% in June alone and remaining largely flat year to date. This represents a meaningful change from the pattern of recent years, when a small group of mega-cap technology carried the index almost single-handedly. 

The Financial Times describes what it calls an extreme rotation, in which investor conviction in the largest technology stocks has weakened and, given the significant index weights, volatility in these companies weighs on the whole index.

At the same time, capital has increasingly flowed toward semiconductor manufacturers, industrial companies, and other businesses benefiting from higher levels of capital investment. Strategas also notes that higher-capital-expenditure companies, including industrial and non-AI related capital goods businesses, have been outperforming, suggesting the rally is becoming less dependent on a narrow group of technology companies.

A similar trend has emerged among smaller companies. Small-cap stocks recorded their strongest six-month period since 1991, with the Russell 2000 beating the S&P 500 by more than 10%.

Bond markets signal higher rates for longer

While equities climbed, the bond market sent a different signal. Yields rose across the curve, with the move most pronounced at the short end. Bloomberg reports that the policy-sensitive two-year Treasury yield reached a high of roughly 4.23% in June, its highest in more than a year and well above the Fed's current policy range of 3.5% to 3.75%.

By month-end, yields eased, allowing the Bloomberg U.S. Treasury Index to post a small gain, but financial markets continued to discount the possibility of at least one Fed rate hike by year-end.

 At the heart of the move is a debate about the neutral rate, or the level of interest rates that neither stimulates nor slows economic activity. A market-based measure of the inflation-adjusted neutral rate sits near 1.8%, well above the Fed's own median estimate of about 1.1%. If the market is right, then current policy may not be as restrictive as policy makers believe, weakening the case for near-term cuts. 

The Fed itself has grown more divided, with 9 of 18 officials indicating at the June meeting that they expect at least one rate increase in 2026. The Fed held rates steady at that meeting, in part because higher market yields are already doing some of the Fed’s work, but also on expectations that inflation will continue moving lower as oil prices normalize following the Iran conflict.

For investors, the practical implication is that borrowing costs may stay higher for longer than markets assumed only months ago, as evidenced by the higher and flatter yield curve.  

Growth Is reaccelerating, not stalling

While higher yields can create headwinds for markets, they also reflect an economy that remains more resilient than many had anticipated.

In June, Goldman Sachs lowered its estimate of U.S. recession risk back to its long-term norm of roughly 15%. Bloomberg reported that U.S. business activity picked up last month, while Scotiabank noted that leading and coincident indicators are signaling a reacceleration in economic growth.

Strategas adds a useful historical perspective: the U.S. has never entered a recession while corporate profits were still growing, unemployment was not yet rising, and without weakness in business fixed investment confirming the turn. None of those conditions are present today. 

The picture, however, is not uniformly bright. Small businesses are more cautious, with the National Federation of Independent Business optimism index falling to its lowest level since 2024. Only 16% of owners plan capital outlays over the coming months, the weakest reading since 2009, while hiring plans have fallen to six-year lows.

Offsetting some of this weakness, tariffs are scheduled to decline through 2026, and Bloomberg describes the administration's tariff defeat in the courts as a potential market tailwind that has received relatively little attention. 

Inflation Is more than just oil 

Inflation reaccelerated in May, and the detail matters. The Consumer Price Index (CPI), which measures the change in prices paid by consumers, increased 0.5% from April and 4.2% from a year earlier, marking its fastest pace in more than three years. More than half of the monthly increase was driven by energy, with gasoline prices rising 7%.

Encouragingly, the core measure, which excludes food and energy, increased a more modest 0.2%. Bloomberg Economics believes headline inflation likely peaked on a year-over-year basis in May, suggesting that the recent acceleration may be less persistent than the headline figure implies.

The concern, however, is that the inflationary pressures extend beyond oil and were evident well before the conflict in Iran.

The New York Times notes that core Personal Consumption Expenditures, which exclude volatile food and energy prices, rose 0.3% in May, suggesting the issue is not solely energy related. A Bank of America Fund Manager Survey found that 34% of investors now view a second wave of inflation as the single biggest tail risk for markets, and the Financial Times reports that neither markets nor consumers expect inflation to return to the Fed's 2% target any time soon.

Five-year inflation breakeven rates, a market-based measure of expected inflation, have nonetheless drifted back to levels seen in January, suggesting expectations remain reasonably anchored for now. 

The consumer Is still spending, but the cushion Is thinning

Consumers continue to spend, but signs of strain are becoming more visible. Bloomberg reports that consumer spending picked up in May, even as inflation hit a three-year high. Pressure is mounting, however, as real disposable income fell 1.1% in April, and the personal saving rate has declined as households draw on savings to maintain spending.

Consumer sentiment reflects the pressure American consumers continue to experience. The Conference Board's measure of consumer confidence edged up only 0.6 point in June, to 91.2, remaining below expectations and still close to record lows. The Wall Street Journal observes economic anxiety is now even rising up the income ladder, rather than being confined to lower-income households.

Stronger equity markets, however, have provided support for consumer spending. The divergence between a market trading near record highs and a consumer who feels increasingly stretched remains an important dynamic to monitor.

American exceptionalism and a weaker Loonie

The continued strength of the U.S. dollar was one of the quarter's defining features. Record weekly inflows into U.S. equities, concentrated in technology, reflected what some are again calling American exceptionalism. The prospect of higher inflation and a Fed rate hike, rather than rate cuts, helped drive the U.S. dollar higher, causing bets on dollar debasement, such as gold, to unwind.

The Canadian dollar was on the other side of this trade, with the Loonie slipping to a 2026 low despite strength in oil prices. It was held back by widening interest-rate differentials with the U.S., concerns around the USMCA trade relationship, and soft domestic investment.

The policy backdrop remains challenging. The Bank of Canada held its overnight rate at 2.25% and warned openly of a policy dilemma: oil-driven inflation argues for caution, while soft domestic demand argues for support. The month was not without positives. A strong May employment report was sufficient to push Canadian bond prices lower, and Bloomberg reported the Canadian economy is expected to rebound in the second quarter.

Oil's stunning round-trip

Few assets reflected the quarter’s shifting dynamics more clearly than oil. After spiking to USD $118.35 a barrel in March following the conflict with Iran, Brent crude fell as low as USD $72.06 in late June, briefly slipping below its USD $72.48 pre-conflict level. U.S. crude settled near USD $71.92, down 36% from its high.

The reversal came just 11 days after the U.S. and Iran reached a 60-day ceasefire agreement on June 14 to reopen the Strait of Hormuz, a resolution that came far faster than many analysts expected. 

Several forces have helped prevent oil from climbing higher than feared during the conflict and contributed to the sharp reversal once a memorandum of understanding between the sides was reached.

China, the world's largest importer, cut purchases and drew on its strategic reserves, while demand appears to have fallen faster than expected. Tanker traffic through the Strait of Hormuz also recovered, reaching a post-conflict high of 78 vessels in a single day, about 57% of pre-conflict levels. Approximately 2 million barrels per day have returned to the market over three weeks. 

We would caution against reading the retreat in oil prices as an all-clear. Global inventories have been drawn down to uncomfortable levels, with the Wall Street Journal reporting OECD inventories are expected to fall below 2.3 billion barrels, the lowest since 2003. Storage at the Cushing, Oklahoma hub recently dipped below the threshold for smooth operations.

Looking further out, the International Energy Agency suggests that if the peace holds, oil supply could far outpace demand next year, with demand falling around 1.1 million barrels per day while supply surges.

The near-term risk is that prices rebound as buyers rebuild inventories; the longer-term risk is the opposite, a supply glut. Either way, oil-related volatility is likely to remain a feature, as questions persist around controls the Strait of Hormuz and the future of Iran’s enriched uranium program.

The AI boom and the risks it carries

The single largest driver of this market continues to be the capital flowing into artificial intelligence. AI computing infrastructure now accounts for a share of U.S. nominal output approaching 1.6%, and the Financial Times questioned whether we are at the start of a new investment super-cycle spanning AI, clean energy, and defense spending.

That investment boom also carries risks. Companies are funding AI-related spending through a combination of cash flow, debt issuance, and equity financing, increasing the amount of capital tied to a single theme. Volatility is also being amplified by crowded positioning and leverage, with retail investors continuing to buy the dips, particularly in semiconductors, at a record pace.

A market this concentrated and leveraged can move sharply when sentiment turns. Valuations now embed a great deal of optimism, and the gap between the earnings yield on stocks and the yield available on bonds—the equity risk premium—has narrowed. 

For the first time in years, bonds are once again offering meaningful competition for investor capital. 

What this means for long-term investors

June was a month of records and cross-currents in equal measure.

Equity markets continue to be supported by strong earnings growth and a multi-year investment cycle centered on AI, although the sources of that strength remain relatively concentrated.

At the same time, market leadership remains narrow, the bond market is pricing higher borrowing costs for longer, inflation is proving broader than energy alone, and the U.S. and Canadian economies are moving in different directions.

Our response to that environment is the same disciplined approach we have long favoured. We continue to believe in broad diversification across asset classes, geographies, and styles, rather than a portfolio concentrated in the leaders of the last twelve months.

We see real value in the higher yields now available on high-quality fixed income, both for the income they provide and for the ballast they offer if equity markets become more volatile. We also remain focused on what we can control: portfolio construction, cost, and the quality of the underlying investments.

The headlines will keep changing throughout the summer. Our investment discipline will not. The long-term case for a thoughtfully constructed, diversified multi-asset portfolio remains unchanged.