Market Insights: It Depends on Which Branch of the “K” You’re On

June is turning out to be quite a remarkable month. Last week, we had the massive IPO of SpaceX, making Elon Musk the world’s first trillionaire and highlighting investors’ cravings for cutting-edge technologies like AI and interstellar innovation at almost any price. Then, over the weekend, after over three months of military conflict and the paralysis of one of the largest thoroughfares for global energy supply, the US and Iran have come to a peace agreement that will de-escalate the fighting and reopen the Strait of Hormuz. While there are crucial elements of the negotiations that remain unresolved, such as the outcome of Iran’s nuclear program, the agreement is a significant milestone in that it re-opens energy access and provides economic relief. Finally, Kevin Warsh chaired his first FOMC meeting amidst a period of heightened inflationary pressures.

After the sell-off in March, equity markets recovered quickly and set new highs in early June despite the Middle East conflict, supported by accelerating investment in A.I. and strong corporate earnings. The broader economy slowed, however, as the conflict drove higher energy prices and inflation, which weighed on consumers’ capacity to spend. The vast majority of oil that travels through the Strait is destined for Asia and the stoppage of tankers caused energy shortages and national emergencies throughout the region, in addition to the price shock felt around the world. Oil prices had nearly doubled at their peak and the impact on inflation was almost immediate, with CPI jumping to 3.3% in April, and even higher in May at 4.2% in the latest Bureau of Labor Statistics report. In comparison, inflation was 2.4% in February with gasoline prices originally projected to fall this year, before the invasion.

The energy shock hasn’t impacted everyone uniformly, as high-earning households with financial investments and low-cost mortgages have been able to accumulate wealth that has outpaced inflation and allows them to continue to spend. Conversely, lower-income households, which generally have far less exposure to the stock market, have struggled to keep pace with inflation and have felt the impact of rising energy costs far more acutely. This places significant strain on household spending for that group and increases credit delinquency and default risk across that population. Because the top 20% of earners control more than half of all consumer spending, their strength has overshadowed the weakness of the significantly larger bottom 80%, creating a dispersion of winners and losers.

This bifurcation is also evident amongst businesses, where earnings growth from the mega-cap tech companies that have been most closely aligned with the expansion of AI have dwarfed that of the rest of the S&P 500 constituents over the past few years. JPMorgan expects an average of over $1tn per year to be invested in the AI ecosystem over the next few years, which will remain a tailwind for these businesses, and their stock prices have risen dramatically to reflect that. For the majority of the remaining constituents of the index, earnings growth has overall been positive, but modest, along with their stock performance. The mega cap tech companies are fully priced and must execute on growth in order to maintain their value trading at high-20x or higher P/E multiples. In contrast, the remaining stocks in the S&P 500 trading at under 20x forward P/E multiples is not cheap, but is much more reasonable and can provide some downside cushion, especially as we enter a period of potential interest rate volatility.

The Federal Reserve welcomed Kevin Warsh as the new Chairman. When Warsh was first nominated, the White House viewed him as someone willing to bring down interest rates, but based on current labor and inflation pressures will now need to decide if a hike is warranted. While the reopening of the Strait and regained access to oil should meaningfully reduce the prospect of a hike, the basis of that decision may depend on which demographic the Central Bank is looking to solve for. Lower-income households already stretched by gas prices and expensive debt would likely find some relief in lower interest rates. However, additional stimulus could further fuel inflation, creating broader challenges for the economy. Alternatively, a hike could potentially contain inflationary pressures, but challenge equity valuations that have made investors so much wealthier over the past few years. We expect the new Chairman to assess the impact of the peace deal on oil prices over the next few months, alongside labor and consumption data, before making a decision to move interest rates towards the end of this year.

For now though, a relatively stable interest rate and equity market environment has allowed for IPOs to return in 2026, with some of the biggest ones in history to come this year, including SpaceX, Anthropic, and OpenAI. What is of note is that these businesses break the mold by entering the public sphere as trillion-dollar-plus businesses that have stayed private well beyond the typical time horizon to develop and execute on their business strategy away from the spotlight of public markets. The headline event was SpaceX, which went public on the Nasdaq with $75 billion of stock of a $1.8 trillion market cap business, the largest public listing in history. This distinction does not make it any less risky, however, as the company remains cash flow negative and is expected to trade at roughly 100x revenue, a valuation that appears expensive even by the standards of its technology and AI peers.

History has shown that initial stock performance of IPOs typically lag the returns of a broader index over the course of the first few years, despite the initial pop in the first few days of trading. Newly public companies have historically tended to lag due to pre-IPO shareholders selling at lockup expirations, unproven earnings, and the simple fact that offerings are timed to favor the liquidity needs of the seller, not the new buyers. While the hype of the company and the ability to acquire stock when it’s first available sounds appealing, it is typically worth waiting for the momentum to settle and holding periods to unlock before investing in the stock.

Our clients sit on the winning branch of the “K”-shaped economy, which makes it tempting to assume the trend will continue. The greater risk, however, is growing too comfortable with recent performance and failing to adjust to the rapidly shifting landscape. As Middle East tensions cool down and equity markets rally, we see the current moment as an opportunity to rebalance portfolios and avoid overstaying in investments that have worked.

Equities – Target Weight

We are constructive on overall earnings fundamentals and expect the strength of the AI theme to continue to broaden out to other sectors and support the economy. However, valuations remain elevated, making disciplined rebalancing particularly important. Rather than retreating from periods of volatility, investors should use them as opportunities to trim what has run and add to what has been unfairly punished.
We continue to view large-cap stocks as the appropriate core of a portfolio given their relative stability and earnings strength. However, the broadening market thesis argues for looking beyond the mega-caps alone. Value-oriented small caps look interesting for their long-term growth potential and relatively cheaper valuations. International economies have been under greater pressure than domestic due to the conflict, but longer-term, emerging markets, particularly in Asia, are exposed to the AI investment supply chain and should benefit from long-term growth and expansion faster than more developed markets.

Fixed Income – Target Weight

Interest rates will likely remain unchanged, with a modest risk of moving higher later this year if upward inflation pressures remain. We are positioning the portfolio for high-quality carry, seeking steady income from investment-grade securities. Portfolio durations remain shorter than the benchmark to mitigate interest rate risk, as well as modest improvement to liquidity to maintain dry powder when better opportunities arise.

Private lending strategies and their structures have come under scrutiny recently. We are long-term constructive on our managers’ ability to weather through a credit cycle. However, given current redemption pressures in the market, we recommend waiting for better entry points.

Alternatives – Target Weight

Hedge Funds

While not the highest returning asset class, hedge funds overall have delivered more consistent returns than traditional stocks and bonds over the past few years. We continue to reduce directional exposures in favor of market-neutral and uncorrelated strategies, which we believe can provide greater resilience in an environment where stock and bond correlations remain elevated. We complement this core with opportunistic, niche strategies to enhance returns including Biotech, AI, short-term lending and small-cap stocks. We continue to explore opportunities in Commodities and Gold. While commodity valuations appear elevated at current levels, a modest allocation may provide diversification benefits within a broader portfolio.

Real Estate

Income remains stable, and valuations are slowly recovering from higher rates and over-supply. We remain most constructive on Industrial and Residential asset types as defensive assets in the current environment. Income-generating real estate strategies can be an attractive complement to Fixed Income allocations for their tax-advantaged distributions.

Private Equity

We remain constructive on private equity as fundamentals are improving and capital markets are stable. Private-market valuations have lagged the rally seen in public markets, leaving the opportunity to catch-up as we look forward. The reopening IPO window is restoring the exit channel that had been the missing piece for several years and should improve distributions from funds over the next couple years.

We held the first close of the Simon Quick Private Equity fund and have begun deploying into these themes, with additional closes planned for this year.

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