Facts:

• After rallying roughly 15% from the late-March lows and notching a string of new all-time highs, stocks receded in early June. The NASDAQ Composite fell 4.2% on June 5th – its largest single-session decline since April 2025 – as investors took profits in semiconductor stocks. The S&P 500 (C Fund) has pulled back roughly 3% from its record peak but remains up approximately 8% year-to-date.
• The May jobs report exceeded expectations, with employers adding 172,000 jobs against forecasts of roughly 80,000. The unemployment rate held at 4.3%, and March and April payrolls were revised up by a combined 93,000. Leisure and hospitality led all sectors with 70,000 new jobs, likely reflecting World Cup hiring.
• Headline inflation rose to 4.2% in May, the highest annual reading since April 2023 and a third consecutive monthly acceleration. Energy accounted for over 60% of the monthly increase, with gasoline up 40.5% from a year ago. Core inflation (excluding food and energy) told a calmer story, rising just 0.2% for the month and 2.9% annually – below expectations.
• The ISM Manufacturing PMI registered 54.0 in May, its highest reading since May 2022 and a fifth consecutive month of expansion. New orders climbed to 56.8, and 16 of 18 industries reported growth.
• Rising long-term interest rates have pushed the G Fund rate to 4.500%, up from 4.000% in March and its highest level since June 2025.
• Oil prices declined notably in May. Despite renewed strikes, Brent crude fell almost 19% in May – its largest monthly decline since the pandemic – and remains roughly 20% below its 2026 peak, holding under $100 per barrel.

Analysis – A Remarkable Recovery, a Wobbly Ceasefire, and an Economy That Barely Noticed

Markets have travelled a long way since we last wrote. The fear-driven selling that gripped stocks when combat erupted in Iran bottomed out in late March, and the recovery since has been emphatic – the S&P 500 (C Fund) climbed more than 15% from those lows, carving out a string of new all-time highs along the way. The turn came as Washington repeatedly stepped back from escalation: deadlines for strikes were extended and extended again, a temporary ceasefire took hold in early April, and negotiations toward a permanent deal progressed through the spring. Investors took the repeated walk-backs as a signal that neither side wanted the conflict to spiral, and bought accordingly.

June has been bumpier. By May, the rally had narrowed considerably – fewer and fewer stocks were carrying the advance, with leadership concentrated in AI and semiconductor names. That kind of narrow market is prone to sharp air pockets, and one arrived on June 5th, when Micron’s 13% single-day drop after its enormous 2026 run dragged the NASDAQ down 4.2%. The geopolitical backdrop then darkened: US Central Command struck Iranian military targets on June 10th, Tehran retaliated against Gulf targets, and the Treasury layered fresh sanctions on Iran’s military oil-sales arm. Markets, in the words of one strategist, have shifted from pricing a ceasefire to pricing a “long grind.”

And yet, look at what the economy did during all of this. Employers added 172,000 jobs in May – more than double expectations – with prior months revised higher. Manufacturing activity hit a four-year high. Over 80% of S&P 500 companies beat Q1 earnings estimates. Even oil, the most war-sensitive asset on the planet, fell nearly 19% in May and has stayed below $100 per barrel through the latest escalation. Each new round of strikes is producing smaller and shorter-lived market reactions. Investors are increasingly treating the conflict as a process headed – however erratically – toward resolution, rather than an open-ended catastrophe.

A Tale of Two Inflations

May’s CPI report looks alarming at first glance: 4.2% is the hottest headline reading in over three years. But the composition matters more than the headline. Energy was responsible for more than 60% of the monthly increase, with gasoline alone up 40.5% year-over-year – a direct, mechanical consequence of the Strait of Hormuz disruption. Strip out food and energy and the picture changes entirely: core inflation rose just 0.2% in May, below expectations, and sits at 2.9% annually. Prices for new cars, household furnishings, and car insurance actually declined.

In plain terms: America’s inflation problem right now is an energy problem, and the energy problem is a war problem. That is genuinely painful for consumers at the pump, but it also means the single most effective disinflation policy available isn’t monetary at all – it’s a durable peace deal. With gas prices already drifting lower in early June, several economists believe May may mark the 2026 peak for headline inflation.

A New Hand on the Wheel at the Fed

There has been a changing of the guard since our last report: Kevin Warsh was sworn in as Federal Reserve Chair on May 22nd, succeeding Jerome Powell, who remains on the Board as a governor. The Fed meets June 16-17 – Warsh’s first meeting in the chair – and markets assign roughly a 90% probability to a hold. We agree. In our view, cutting rates with headline inflation above 4% would damage the Fed’s credibility, political pressure from the White House notwithstanding – and notably, market chatter has shifted from “when is the next cut?” to “could the next move be a hike?” We view a hike as unlikely given the softness in core inflation, but the question itself shows how much the energy shock has reshaped expectations. This is also a Summary of Economic Projections meeting, so the updated dot plot will be the first written evidence of where the Warsh-era committee believes rates are heading. Watch for a formal shift from an easing bias to a neutral stance.

Final Thoughts

June’s choppiness has been driven by profit-taking in an over-extended corner of the market and a noisy news cycle – not by deteriorating fundamentals. The underlying evidence remains firmly positive: hiring has reaccelerated, manufacturing is at a four-year high, core inflation is contained, and corporate earnings continue to beat. The swing factor for the second half of 2026 remains energy. A durable resolution with Iran would simultaneously cut headline inflation, lift consumer spending power, and reopen the door to rate cuts – a triple tailwind. Until then, expect continued headline-driven swings, and treat them as what they have been all year: opportunities, not omens.