Portfolio Highlights 

Due to the changing geopolitical environment, we made several allocation changes during the first five months of 2026.  These changes are designed to improve portfolio resilience and increase diversification, while reflecting our core view that portfolios should remain positioned for long-term growth, while remaining balanced against elevated interest rates, persistent inflation risk, geopolitical uncertainty, and U.S. equity concentration. 

We streamlined our equity exposure by reducing overlapping large-cap allocations and eliminating redundant holdings, while maintaining an emphasis on quality.  We also added value focused active large-cap core exposure to diversify away from the traditional market-cap weighted indices.  Our foreign equity exposure increased slightly as non-U.S. equities continue to trade at meaningful valuation discounts, and exposure to different economic cycles, currencies, and sector compositions will increase diversification and return drivers outside of the U.S.  Finally, we reduced exposure to publicly traded REITs, given their sensitivity to rising interest rates and less attractive relative valuations, while adding selective exposure to artificial intelligence infrastructure, defense and energy, which may benefit from long-term secular trends, global fiscal spending, supply constraints and inflation sensitivity. 

Within fixed income, we reduced certain passive U.S. Treasury and investment-grade credit exposures, especially in longer maturities with greater sensitivity to rising interest rates.  We continue to like high quality short and intermediate term bonds where investors can earn attractive income without taking excessive duration risk.  However, credit spreads remain tight, so we are being selective and avoiding an overreliance on passive corporate credit ETFs.  Therefore, we have added exposure to more flexible and diversified income strategies, including active multisector bond management, inflation-protected securities, and asset-backed securities.  These adjustments are designed to enhance income generation, reduce duration, and diversify credit exposure. 

Overall, these changes moved portfolios away from beta-heavy allocations and toward a more intentional mix of quality equities, active management, diversified fixed income, inflation-sensitive assets, and targeted growth opportunities.  Our objective remains to participate in market upside, while maintaining a disciplined focus on risk management, income generation and diversification across a wider range of economic and geopolitical outcomes. 

Market Review 

Year-to-date equity gains have been broad-based with the Russell 2000 up ~13.1% highlighting improved sentiment toward smaller companies as investors look for broader participation beyond mega-cap technology.  Nasdaq Composite also performed well, up ~14.8% on continued strength in technology, semiconductors, and AI related companies.  Likewise, the S&P 500 was up ~9.7% and remains near record levels, while the Dow Jones Industrial Average lagged somewhat, but still delivered attractive returns of 4.9%. International equities also performed well, benefiting from improving growth expectations, more attractive valuations, and a weaker U.S. dollar. 

In fixed income, the 10-year U.S. Treasury yield recently broke 4.6% for the first time in more than 12-months, after starting the year at 4.15%, while the yield on 30-year U.S. Treasury touched 5.20%, a level not seen since 2007.  This market volatility was primarily the result of continued concerns over the rising deficits, Treasury supply, trade policy, and increased inflation caused by rising oil prices.  Credit spreads remain tight, suggesting that markets are not yet pricing in significant corporate stress, which reflects investors’ confidence in corporate balance sheets.    

What to watch in the second half of 2026

The market outlook for the remainder of 2026 will be defined by the economy’s ability to maintain its resilience in the face of rising structural risks. Artificial Intelligence remains a central growth theme, but the markets are increasingly scrutinizing whether the large capital expenditures on data centers by the hyper-scalers will translate into durable earnings growth, especially in the face of mounting local political opposition. 

Geopolitics and trade policy will likely remain persistent sources of volatility. The Iran conflict has already greatly affected many global commodity markets, including energy, fertilizer and helium, while upending global trade routes and shipping costs. U.S. and China tensions continue to center on trade, technology, rare earths, semiconductors and Taiwan. Recent negotiations have reduced some near-term pressure, but the broader strategic rivalry remains unresolved at a time when it appears that China is one of the biggest beneficiaries of the Iran conflict.

Finally, Central bank policy will remain another key area of focus. Kevin Warsh was confirmed as the next Federal Reserve Chair, which marks an important transition for monetary policy. The Fed continues to face a difficult balancing act with stubbornly elevated inflation, in part due to energy and tariff-related pressures, while labor-market momentum has moderated, but remains stable. This reduces the likelihood of an aggressive easing cycle unless growth weakens materially.  

The Fed and Looking Ahead

The Federal Reserve has held rates steady during the first three meetings of 2026, maintaining the overnight rate at 3.50%-3.75%. Earlier expectations for multiple rate cuts in 2026 have been scaled back significantly as inflation has remained sticky and energy prices have risen. At the last meeting in April, three voting members opposed including an “easing bias” in the final statement, hinting that rate hikes, not rate cuts, might be more appropriate in the near future. Finally, the transition of the Chairman from Jerome Powell to Kevin Warsh adds another layer of uncertainty to future Fed policy due to Chairman Warsh’s recent stated preference for rate cuts, despite historically being an inflation hawk. Regardless, we expect the Federal Reserve to remain data dependent and focused on restoring inflation toward its 2% target.