Q2 2026 Investment Update
As the second quarter of 2026 comes to a close, markets have continued to navigate a changing economic landscape. Investors were encouraged by signs that inflation was moderating late in Q2, though uncertainty around interest rates and geopolitical tensions continued to contribute to market volatility. Despite these challenges, the U.S. economy remained relatively resilient, supported in part by steady consumer spending, a healthy labor market, and generally solid corporate earnings.
As always, short-term market movements are a normal part of investing. Our approach remains focused on maintaining diversified portfolios that align with each client's long-term financial goals rather than reacting to day-to-day headlines.
Economic and Monetary Policy Overview
Federal Reserve outlook
The Federal Reserve left interest rates unchanged throughout the second quarter, continuing its cautious approach as it monitored inflation and broader economic conditions. While inflation has improved from its peak, the Fed has indicated that it is continuing to evaluate incoming economic data before making any changes to interest rate policy.
Labor market
The labor market remained relatively healthy during the quarter, with unemployment staying low and employment levels broadly stable. Although hiring continued to slow from the stronger pace seen in prior years, the labor market remained an important source of support for the U.S. economy.
Global backdrop
Geopolitical tensions, particularly in the Middle East, remained an important topic throughout the quarter. While energy markets stabilized compared to earlier this year, ongoing uncertainty continued to influence investor sentiment. Markets generally adapted to these developments, although geopolitical risks remain an important factor to monitor.
Investment Themes and Portfolio Positioning
Portfolio update
During the first half of the year, we made several updates to our investment models to reflect changing market conditions while maintaining our long-term investment philosophy.
Earlier this year, we fully exited our real estate allocation and reinvested those proceeds into large-cap U.S. equities. We also modestly reduced our exposure to small- and mid-cap stocks, while increasing our allocation to large-cap U.S. equities and adding a dividend growth fund to provide additional exposure to high-quality businesses with a history of growing shareholder payouts.
Outside of traditional stock and bond investments, we continue to evaluate opportunities in alternative investments where they may offer additional diversification or attractive risk-adjusted return potential. We continue to explore structured note opportunities when market conditions and pricing are favorable, as they may offer unique income or downside risk-management characteristics within appropriate client portfolios, although outcomes will vary.
Large-cap U.S. equities
Large-cap U.S. equities remained a key driver of market performance, supported by technology, artificial intelligence investment, and expectations for earnings growth. These companies continue to represent a significant allocation within our equity portfolios.
International stocks
We continue to maintain a 25% allocation to international equities. While performance has varied across global markets, maintaining international exposure remains an important part of a diversified portfolio and provides access to opportunities outside the United States.
Artificial Intelligence
Artificial intelligence continues to be one of the most closely watched investment themes in today's market. We have maintained our AI allocation, as technology continues to expand across a growing number of industries and remains a significant theme within today's market environment.
Fixed income
Higher interest rates have continued to provide bond investors with yields that remain above levels seen in recent years. Fixed income also continues to play an important role in portfolio diversification and may help reduce overall portfolio volatility.
Our fixed income allocation has outperformed its benchmark through the second quarter. Through the end of the second quarter, our bond allocation returned 0.93%, compared to 0.59% for the Bloomberg U.S. Aggregate Bond Index (AGG). While short-term performance will vary, two quarters of relative outperformance should not be viewed as indicative of future results.
Market Risks and Headwinds
Federal Reserve uncertainty
One of the primary drivers of market volatility this quarter has been uncertainty surrounding Federal Reserve policy. While inflation eased late in the quarter, it remained above the Federal Reserve's long-term target and had not declined enough for the Fed to clearly signal the timing of any future changes to interest rate policy.
Market valuations
Following another strong quarter for U.S. equities, particularly within large-cap technology companies, market valuations have become more elevated. Higher valuations can increase sensitivity to changes in economic data, interest rates, and corporate earnings, reinforcing the importance of maintaining a diversified portfolio.
Looking Ahead to Q3 2026
As we enter the second half of the year, market attention will likely remain focused on inflation, Federal Reserve policy, corporate earnings, and geopolitical developments. These factors are likely to continue influencing investor sentiment and market performance.
Our investment philosophy remains centered on broad diversification, disciplined portfolio management, and making thoughtful allocation decisions as market conditions evolve.
If you'd like to review your current portfolio or discuss how the market environment may impact your financial plan, please don't hesitate to reach out. We'd be happy to schedule a time to talk.
As always, thank you for your continued trust and partnership. We're grateful for the opportunity to help you pursue your financial goals and look forward to working with you in the months ahead.
