MARKET UPDATE

Navigating Shocks and Finding Opportunity Ahead

Global markets started Q2 strong before shifting gears in the latter half of the quarter. The U.S. stood out, bolstered by solid corporate earnings and a surge in capital spending—particularly on AI infrastructure.

This strength contrasted with countries more dependent on energy imports, which faced headwinds. International markets bounced back from a sluggish Q1, with regions riding the AI wave outperforming others. The silver lining? Market volatility has reset valuations without shaking the fundamentals underneath—a reassuring backdrop for investors.

Three Big Catalysts

This quarter hinged on three major forces: 1.) The accelerating AI arms race, 2.) Geopolitical tensions from the Strait of Hormuz and energy volatility and 3.) New Federal Reserve leadership under Kevin Warsh.

The AI Investment Boom

Hyperscalers are spending north of $2 billion daily on AI capex, and the pace shows no signs of slowing. We're moving beyond hype; real use cases are emerging and reshaping how companies operate and support their workforces. The critical question — whether AI will actually move the needle on profits — is starting to get answered as these massive investments continue. It's an unprecedented moment, and we're still in the early innings.

Three Big Catalysts

This quarter hinged on three major forces: 1.) The accelerating AI arms race, 2.) Geopolitical tensions from the Strait of Hormuz and energy volatility and 3.) New Federal Reserve leadership under Kevin Warsh.

Energy Volatility Matters

Energy prices and supply remain key market movers. Disruptions flowing from the Strait of Hormuz could trigger sharp market swings (illustrated in Oil Prices chart). That said, the U.S. has a structural advantage many countries lack: It produces approximately 13.8 million barrels of crude oil daily and imports only about 3 million (down from about 10 million in 2010) (illustrated in AAA National Daily Averages chart). As a net exporter, this places the U.S. in a unique position to support its industrial activity with lower reliance on foreign energy.

Sources: Bloomberg, RBC Rochdale as of 7/28/2026. Information is subject to change and is not a guarantee of future results.

Fed Leadership and Policy

The new Fed chair must navigate tricky terrain: balancing the dual mandate of price stability , approximately 2% inflation (illustrated in Inflation CPI YoY%chart) while deciding whether to look through energy and AI hardware price swings. Warsh's early move — establishing task forces with former Fed officials and academics — signals a thoughtful approach to maintaining institutional independence. It's a solid start.

Bottom Line

Markets absorbed considerable change this quarter while keeping their eyes on fundamentals — a healthy sign. With volatility likely to persist and multiple moving pieces in play, here's our view: Stick with your long-term investment plan and stay in close touch with your portfolio managers. They can help you navigate what's ahead.

Staying invested remains critical to capturing returns for the balance of the year. At the same time, be thoughtful about concentration risk. Consider diversifying into lower-correlation investments outside of tech to insulate your portfolio from technology-specific swings. It's a balance between staying committed and staying prudent.

Inflation CPI YoY %

Sources: Bloomberg, RBC Rochdale as of 7/28/2026. Information is subject to change and is not a guarantee of future results.

EQUITY

Earnings-Led Rebound Lifts Equities to Records

U.S. equities staged a powerful rebound in Q2 2026, with the S&P 500 gaining approximately 15% to reach new all-time highs, its strongest quarter since the 2020 post-pandemic recovery. The advance reversed Q1’s decline as the US-Iran conflict de-escalated, oil price returned to pre-crisis levels and corporate earnings reaccelerated (ref. Q2-2026 U.S. Equity Performance chart).

The rally was earnings-driven rather than valuation-driven. S&P 500 earnings growth for the quarter is tracking near 23% year-over-year (YoY), with revenue growth of roughly 12% and continued margin expansion. Despite the sharp price gains, the forward price-to-earnings-ratio (P/E) finished near 22x, only modestly above its 10Y average, suggesting the advance rested on fundamentals rather than multiple expansion.

Market leadership evolved meaningfully as the quarter progressed. Technology and AI-related themes, led by semiconductors, drove the internal move off the spring lows. By quarter-end, however, participation has broadened significantly. Equal-weight, small-cap, and value benchmarks all reached new record highs alongside the cap-weighted index. This broadening is a constructive signal for the durability of the advance.

June brought a clear rotation in leadership toward Industrials, Financials, and Health Care, while Technology and Communication Services lagged on near-term profit taking. Industrials returned over 20% year-to-date (YTD), similar to Technology. Energy gave back its Q1 leadership as oil retreated toward pre-crisis levels, underperforming for a second straight month.

Style performance favored growth over the full quarter, extending its position as the dominant leadership factor on the strength of technology earnings momentum. Yet the late-quarter broadening into value and smaller-capitalization stocks marked a healthy shift beneath the surface, with cyclicals generally outpacing defensives (ref. Q2-2026 U.S. Sector Performance chart).

The backdrop for equities turned less accommodative. Newly confirmed Fed Chair, Kevin Warsh, established a more hawkish tone, refocusing policy on the 2% inflation mandate. Market shifted from pricing rate cuts toward higher-for-longer-expectations, a dynamic worth watching, as sustained rate pressure could challenge valuations even as earnings remain strong.

INVESTMENT-GRADE FIXED INCOME

Volatility Overshadows Early Gains

The first quarter of 2026 witnessed a dramatic shift in fixed-income markets, as initial gains in January and February were erased by a steep decline in March. This reversal stemmed largely from escalating geopolitical tensions in the Middle East, which fueled inflation concerns given a sharp rise in oil prices, alongside worries about slowing economic growth.

The heightened uncertainty prompted a significant repricing of yields, with municipal bonds (-0.18%), investment-grade corporates (-0.54%) and U.S. Treasuries (-0.04%) all delivering negative total returns for the quarter (ref. Total Returns chart).

March’s volatility stemmed from overlapping risks: private credit stress, AI-driven labor concerns and geopolitical tensions. Treasury yields surged 30–45 basis points, with the two-year yield breaching 4% as markets abandoned rate-cut expectations. Despite this, credit spreads proved resilient. Investment-grade corporates saw only modest widening, and high-yield spreads quickly retraced to pre-conflict levels, signaling no fundamental credit deterioration —just a normalization of risk pricing amid higher rates and growth uncertainty. Overall, corporate balance sheets remain healthy and higher yields create strategic entry points.

Notably, municipal yields surged by 40–60 basis points, surpassing Treasury movements and highlighting heightened sensitivity to inflation and broader market unease. Consequently, municipals now offer improved valuations after March’s repricing. Taxable-equivalent yields appear attractive for high-quality issuers, particularly in the intermediate sector (5–10 years), where the sell-off reset prices. Credit quality remains solid, but issuer dispersion is rising, necessitating disciplined security selection (ref. Yields chart).

We are encouraged by the cease-fire negotiations but remain cautious on the war’s long-term conclusion. While geopolitical risk has created noise, we do not see indications of systemic stress and the credit market behavior reinforces this view.  Looking ahead, we anticipate the 10-year U.S. Treasury yield to range between 3.75% and 4.25%, with the Federal likely to remain on hold until the second half of 2026. However, the Fed remains data-dependent and patient and we continue to see a plausible path toward lower rates later in the year. Despite higher yields, credit markets have demonstrated stability, creating opportunities across fixed income —especially in the municipal bond market. We continue to expect income generation to likely underpin 2026 return expectations, with curve positioning critical as rates seek stability.

** Taxable Equivalent Yield (TEY) Assumes 37% Federal Tax and 3.8% Medicare surcharge.

Sources: Bloomberg US Treasury 1-5 Yr Total Return (TR) Index, Bloomberg USD Corporate Bonds 1-5 Yr TR Index, Bloomberg Municipal Bond: Muni Short 1-5 Yr TR Index, Bloomberg US Intermediate Treasury TR Index, Bloomberg Intermediate Corporate TR Index, Bloomberg Municipal Bond Inter-Short 1-10 Yr TR Index, Bloomberg US Treasury TR Unhedged Index, Bloomberg U.S. Corporate TR Value Index, Bloomberg Municipal Bond Index as of 12/31/2025. Past performance is not a guarantee of future results.

HIGH-YIELD FIXED INCOME

High Yield Rebounds as Income Leads

High-yield municipal bonds (HYM) have emerged as a standout performer, delivering gains above 4% year-to-date, driven by stable demand, secondary market liquidity and steady credit conditions.

For tax-efficient investors, high-yield municipal bonds offer particularly attractive income opportunities heading into the second half. The resilience of municipal fundamentals and consistent investor appetite have positioned HYM as a compelling alternative within the broader high-yield landscape (ref. High-Yield Corporate Spread chart).

Meanwhile, the taxable high-yield markets also experienced a sharp rebound, recovering faster than expected from March’s volatility. Spreads on the Intercontinental Exchange Bank of America (ICE BofA) U.S. High-Yield Index tightened from 346 basis points  (bps) in late March to 275 bps by quarter-end, among the narrowest levels of this cycle. Despite upward pressure from U.S. Treasury yields, strong coupon income and spread compression drove modest positive returns of approximately 2.4% year-to-date for the major benchmarks.

Supportive macro conditions drove the recovery. Easing geopolitical tensions in the Middle East, stabilizing energy flows and fading inflationary pressures restored investor confidence across the market. Technical conditions improved sharply, with March outflows reversing to inflows and primary market issuance surging to record levels as companies refinanced ahead of an uncertain rate trajectory. The Fed’s tilt toward further tightening reinforces income as the primary return driver going forward, rather than spread performance.

Sector dispersion persists and warrants caution. Technology credits continuing repricing amid AI-driven business model reassessments, while energy issuers benefit from elevated commodity prices. This bifurcation, though more orderly than earlier in the year, reflects market adjustments. Spreads are trading well below their 400 bps long-term average, yet the Moody’s trailing default rate approaches 4.5%. While tight spreads and rising defaults can temporarily coexist, it signals the need for disciplined credit selection, prioritizing quality and liquidity over yield-chasing in stressed segments.

Looking ahead, we believe income should anchor portfolio returns. Current yields support mid-single-digit annual returns, particularly for high-yield municipals. Investors should remain vigilant and favor defensive positioning amid elevated default risks and compressed valuations across the market.

High-Yield Corporate Spread: June 2006 - June 2026

Source: Bloomberg High-Yield Corporate OAS Index as of 6/30/2026. Past performance is not a guarantee of future results.

ALT ALLOCATIONS

A Constructive Reset Across Private Markets

Alternative investments entered the second quarter under pressure and exited it in better shape. Across private credit, private equity and real assets, the pattern was consistent: Less activity, more discipline and a healthier balance between risk and reward.

Private credit stabilized after March volatility. Redemption requests in semi-liquid vehicles topped $20 billion in the first quarter, the first real test of these structures at scale. The safeguards largely worked as designed, and managers seem to be aligned on how to work through redemption cycles, balancing outflows with inflows, maturities and financing solutions. Pricing has also reset in lenders’ favor, with spreads on new middle-market loans roughly 25 to 50 bps wider than late last year. Software remains the pressure point as AI disruption increasingly looks structural rather than cyclical, and underwriting standards have tightened in response.

Private equity was quieter. U.S. deal value fell 38% from the prior quarter to $177 billion as sponsors stepped back from large, financing-dependent transactions and exit activity slowed as well. IPOs were the brightest spot, doubling from the first quarter, while continuation vehicles and secondaries carried more of the burden of returning capital. Fundraising rose 9% in the first half versus a year ago, but commitments are concentrating among managers who can show realized returns. For new capital, lower entry multiples and motivated business sellers have historically been a solid environment.

Real assets stood out. Private infrastructure fundraising reached a record $251 billion in 2025, up more than 150% from the prior year, and nearly 700 funds were in the market this spring seeking $555 billion more (ref. Private Infrastructure Fundraising chart). The AI buildout is the engine: Capital spending by the largest data center operators is on pace to approach $750 billion this year, nearly double 2025 levels, with power availability now the binding constraint (ref. Data Center Capital Expenditure chart).

RBC Rochdale's approach to alternatives is unchanged. We favor selectivity, demand fair compensation for illiquidity and let discipline, not momentum, set the pace.

THE FED

There Is a New Sheriff in Town

Kevin Warsh became the 17th Chair of the Federal Reserve back in May. He has been eager for this job for some time and he hit the ground running.

First and foremost, Warsh made it clear that he had “[...]No tolerance for persistently elevated inflation.” This is an important step by the new Chair to establish credibility with the financial markets by telling the world that he is willing to make hawkish changes to monetary policy to achieve the goal. That said, he has yet to frame out the strategy for delivering on the pledge. We believe that Warsh and other Fed policymakers will wait until at least September for the summer data to be released before they make a decision on possible policy changes.

The five task forces created are communication, balance-sheet policy, data, job productivity and inflation framework. They will be led by highly credible external advisors who will work with Fed staff members. The advisors are made up of prominent academics, former central bankers and well-established business executives.

RBC Rochdale believes the Fed may not make any changes to the federal funds rate this year. Yet, we understand there is a high level of risk that the Fed will have to raise interest rates because inflation does not decline fast enough for their comfort level. But we see inflation has been high due to three key areas: Tariffs, energy and AI. The tariffs, which were put in place last year, should soon fall off the yearly inflation calculation. Energy and AI inflation will probably not be impacted by interest rates moving up 25 or 50 bps, since they are inelastic; people and companies will still buy them at the higher prices. So, changes in Fed policy would have very little impact on demand. 

The median funds rate currently stands at 3.625% and has been there since last December (ref. Federal Funds Rate chart).

Federal Funds Rate
%, media rate

Sources: Federal Reserve, data as of 6/20/2026. Past performance is not a guarantee of future results.