Market Thoughts: The end of the beginning?

We have a signed memo of understanding between the U.S. and Iran. Also, a 60-day ceasefire and reopening of the Strait. I hope it holds. Investors have embraced the ‘give peace a chance’ mantra. Reality may prove more complicated.

If there’s been a ‘peace dividend’ for investors, it’s seen across the energy complex and equity markets. Equity investors are adept at looking through geopolitical events. In particular when bond markets aren’t rioting. So far, they’ve only rumbled.

Retail investors remain a driving market force, both in cash equities and options. If a ceasefire holds, they have second-quarter earnings to focus on. From discussions we’re having with C-suite execs, it appears we’ll see another strong earnings season.

If that proves true, I expect risk assets remain well supported. Broad equity markets driven higher by earnings growth, not run-away multiple expansion. That’s healthy. Though it remains a narrow channel of leadership.

It would be nice to see a rotation from concentrated momentum and growth names back into sectors that have lagged. It allows big-tech and AI-related stocks to catch their breath. It also signals investors are comfortable with the broader market. Aligned with expected earnings growth ahead.

At month-end, we’re likely to see large institutional money managers rebalancing portfolios. As of this writing, the S&P is up +15% since the end of March. We could see a trimming of equity positions that have drifted higher. Prudent risk management, not a negative about the market outlook.

With investor positioning skewed to being long equities, any rush to the exit makes the market vulnerable to amplified selloffs. There is a critical difference between exaggerated volatility and a chronic risk of loss. The former creates opportunity. The latter is a bad investment.

For all the noise ahead of Kevin Warsh’s first monetary policy meeting as Federal Reserve Chair, it proved the non-event we expected. A new beginning. Pundits inevitably feel compelled to headline hustle. Many times for theatre. Talkers talk; doers do. I prefer doers.

For those spinning a surprise hawkish tilt from the FOMC, I’d challenge it. It was a mark-to-market on inflation. It reflects pragmatism. The Federal Reserve (Fed) has been signaling rising concern about inflation. They’ve merely crystallized that view.

The Summary of Economic Projections (SEP) showed half of members who submitted forecasts believed at least one hike would be needed this year. The market is pricing in Fed tightening by October, with a chance of two hikes by year end. Every monetary policy meeting ahead is a ‘live’ meeting.

I view a split SEP warranted. A removal of forward guidance was telegraphed. There are more changes coming. Price stability and maximum employment, however, remain the Fed’s mandate. To borrow a line from Kevin Warsh: “getting monetary policy right.” No pressure.

Higher inflation is with us for a while. That leaves central banks in bardo. Policymakers need to talk tough as inflation presses higher. Enough to remind investors they’ll raise rates if they have to. Speak softly and carry a big stick. Let markets do the heavy lifting. So far, bond investors remain composed.

If the bond market were worried about inflation, we would have seen long term rates rise. So far, pressure has been contained to the front end of the curve. We’ve seen the curve flatten between 2- and 10-year yields as short term rates rise. That reflects a market pricing in tightening. One and done is ‘fine’ for risk assets. Two or more hikes might spark a selloff.

Policymakers don’t want to be embarrassed again… slow to act in the face of inflationary pressure believed transitory. Fool me once, shame on me. Fool me twice and there’s a problem. The dilemma for central banks is knowing the bigger concern may be a hit to growth.

We saw that unease play out at the Bank of Japan (BoJ). They raised rates by 25bps (to 1%), the highest rate seen in Japan since 1995. Their balancing act to buffer the rate hike? Committing to stop slowing purchases of Japanese Government Bonds. One hand tightens, the other eases. I won’t pile on with any ‘two-handed economist’ barbs.

While the Fed chose to stand still, we may eventually see policy that rhymes with recent BoJ action. Equally, the Fed may at some point choose to restart rate cuts. They can balance that out by slowing purchases of U.S. Government Bonds. Something Kevin Warsh has been vocal about.

For now, the prudent course of action is for the Fed to hold the line. It buys time and provides optionality. It’s been entertaining to watch market pundits square off, pressing for either multiple rate cuts or hikes. If there was ever a sign to hold policy rates steady, that’s it.

Whether it relates to monetary policy, a new Fed Chair, or lasting peace in the Gulf, time will tell. Until then, the macro environment continues to support—with air pockets—risk assets. Arguing for diversifying the risks you’re taking. Wealth is created by concentrating risk. It’s preserved by diversifying it.

“Now this is not the end. It’s not even the beginning of the end. But it is, perhaps, the end of the beginning.” Winston Churchill

Unless explicitly stated otherwise, all data is sourced from Bloomberg, Finance LP, as of 6/18/26

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