Key Private Bank Investment Brief

Key Takeaways:

The S&P 500 hit an all-time high last week. The recent rebound marks the swiftest-ever recovery back to a closing high after a decline of at least 15%, according to Dow Jones Market Data.

After the recent rally, the S&P 500 is up 5.6% year-to-date (YTD) through June 27, 2025. International stocks have led the way in 2025, highlighting the benefits of diversification. YTD through June 27, 2025, developed non-US equities have risen 20.2%, while emerging market equities have risen 16.1%; US small caps have lagged, down 1.9%.

YTD through June 27, 2025, fixed income returns have been mixed. US core bonds have returned 3.6% while high-yield bonds have returned 4.6%. Municipal bonds have lagged, down 0.8%.

Real assets have been generally beneficial to portfolios in 2025. Gold has risen 24.4% YTD through June 27, and copper has risen more than 25%; oil is the exception, down 9.2%.

The US dollar remains at multi-year lows, down 10.3% YTD versus a global currency basket. There is no sign of an imminent rebound in the dollar.

“Hard” economic data is weakening – “catching down” with previously weak “soft” (survey) data. Geopolitical, economic, and trade policy uncertainty all remain elevated.

Hard economic data represents real economic activity, such as Gross Domestic Product (GDP), employment data, etc.; while soft data is survey-based.

Survey data has been persistently weak in recent months. Recently, hard data also turned lower, according to data from Bloomberg. The economy is not falling off a cliff, but growth appears to be slowing on the margin.

Housing market activity is slow, even though prices remain elevated. Pending home sales remain near record lows, and nationally, there are 34% more sellers in the market than buyers, according to data from Redfin, the National Association of Realtors, and Bloomberg.

Housing market activity is correlated with economic growth, so we will continue to watch this data closely. Much of the average household’s net worth is contained within real estate. A persistently weak housing market is a bad sign for overall growth, although some of the slowdown in activity is related to higher mortgage rates.

The Strait of Hormuz is an important oil trade route. There was some concern in recent weeks that Iran might attempt to close this waterway. Those fears have yet to materialize, and the Strait of Hormuz remains open with ships passing through freely, according to data from marinetraffic.com.

Bottom line – how to invest now.

Equity valuations are again extended, and credit spreads are tight, while the US dollar is at a multi-year low. In the current environment, we would be judicious about putting fresh capital to work. Leg in incrementally and remain “Neutral to Risk” and neutral to duration. Diversify via real assets and international markets.

When volatility is low, preserve capital. When volatility is high, deploy capital. We continue to watch implied volatility (VIX) and other sentiment indicators for moments to put incremental capital to work. We will continue to highlight these if/when such opportunities present themselves. For examples, please refer to our National Client Call from April 9, 2025.

Real assets, such as gold and energy stocks, have provided important diversification in recent weeks – we continue to recommend real assets in client portfolios. Treasuries have been less effective at offering diversification but could be additive if things worsen materially.

We would use any US dollar strength to further diversify into non-US assets. We believe non-US equities should represent approximately 30% of an investor’s total equity portfolio, although each client is unique.

Equity Takeaways:

Stocks were mixed in early Monday trading. The S&P 500 rose approximately 0.2%, to 6185. Small caps dipped fractionally, about 0.1%. International shares were slightly lower.

The S&P 500 hit an all-time high last week. July is seasonally the strongest month of the year historically, so over the short-term, this rally could continue if traditional patterns hold.

Earnings growth continues to support stock prices. Since early May, forward earnings growth estimates have stabilized and begun to move higher again. Tariff rollbacks and trade deals seem to have stabilized earnings growth expectations, and the stock market has taken notice.

Breadth, as measured by the NYSE Cumulative Advance-Decline Line, continues to set new highs, suggesting the market is likely to power higher on the back of broad participation. Broad market participation is healthy and suggests the recent rally has legs.

Copper prices are a traditional bellwether of economic growth. Copper prices have rallied strongly off the April lows, another sign that traders are expecting economic growth to re-accelerate.

Fixed-Income Takeaways:

Treasury yields moved lower last week as traders anticipated a faster pace of rate cuts beginning later this year. Even though Chair Powell maintained the “wait-and-see” stance at his semi-annual testimony to Congress last week, a portion of this move may have been driven by speculation that President Trump may announce his pick for Federal Reserve (Fed) Chair in the relatively near future (Powell’s term as Fed Chair ends in May 2026). Trump has continued to advocate for lower interest rates in recent weeks, and his pick for Fed Chair is expected to echo that sentiment.

Market participants are now pricing between 50 and 75 basis points of rate cuts by year-end 2025. The current fed funds rate is the target range of 4.25% to 4.50%.

The Treasury curve continues to steepen, with short-term yields moving lower at a faster pace than long-term yields. The short end of the yield curve is heavily influenced by Federal Reserve (Fed) policy, while long-term yields are more influenced by inflation and economic growth.

In early Monday trading, 2-year Treasuries were yielding 3.73%, 5-year Treasuries 3.82%, 10-year Treasuries 4.26%, and 30-year Treasuries 4.81%.

Credit spreads remain very well contained. Liquidity is plentiful. Spreads continue to grind tighter. During the recent stock market rally, high-yield bonds have outperformed their investment-grade (IG) counterparts.

Key Takeaways:

A new chapter in Middle Eastern history has begun.

Risks of widening conflict in the Middle East further escalated following Trump’s military strikes on Iran this past weekend; what happens next is highly uncertain, and there is wide debate about whether the recent events will usher in a new, more volatile chapter or hasten the demise of the current one. Either way, the status quo is unlikely to continue.

New “red lines” are being re-drawn, including retaliatory attacks on US assets; closure of the Strait of Hormuz; and regime change in Iran (driven from within or propelled by external forces). These potential issues would all be categorized as short-term, “risk off” events.

Longer-term impacts will depend on the scope and duration of war, which could compound trade-related stresses, exacerbate supply chain challenges, and trigger additional stagflationary impulses. This situation further complicates matters for the Federal Reserve (Fed) regarding the outlook for interest rate policy.

Typically, geopolitical events are short-lived. Typically, other forces play a larger role.

The US is currently a net exporter of energy according to the Energy Information Administration. The situation today is not like the 1970s, when the US was an oil importer and suffered inflationary price shocks and ultimately a recession due to the 1973 oil embargo.

In the past, when oil prices spiked higher by approximately 80% year-over-year, the economy experienced a recession, according to data from the Federal Reserve Bank of St. Louis. Before the recent crisis, oil prices were approximately $60 per barrel, implying a tipping point of between $105 and $110 per barrel if prices were to escalate that high.

In early Monday trading, WTI crude prices were hovering around $74 per barrel, essentially unchanged on the day.

Bottom line – how to invest now.

When volatility is low, preserve capital. When volatility is high, deploy capital. We continue to watch implied volatility (VIX) and other sentiment indicators for moments to put incremental capital to work. We will continue to highlight these if/when such opportunities present themselves. For examples, please refer to our National Client Call from April 9, 2025.

Real assets, such as gold and energy stocks, have provided important diversification in recent weeks – we continue to recommend real assets in client portfolios. Treasuries have been less effective at offering diversification but could be additive if things worsen materially.

If the situation in the Middle East continues to escalate, the US dollar could rally on safe haven flows, as many nations are more reliant on oil imports than the US. Put another way, the US is more energy independent than most nations.

We would use any US dollar strength to further diversify into non-US assets. We believe non-US equities should represent approximately 30% of an investor’s total equity portfolio, although each client is unique.

Equity Takeaways:

Stocks were higher in early Monday trading. The S&P 500 rose approximately 0.6%, to 6003. Small caps also rose approximately 0.6%. International shares were mixed.

News of the US attacks on Iranian nuclear facilities initially caused a spike in oil prices, but by Monday morning, the spike had reversed. Overall market reaction was muted in early Monday trading. Market participants appear to be suggesting that the situation in the Middle East is not likely to escalate further.

The S&P 500 has been consolidating near all-time highs. On a percentage basis, the recovery off the April lows has been very sharp, so a period of consolidation would not be surprising.

If the Iranians were able to close the Strait of Hormuz, and keep it closed, oil prices would likely rise to over $100 per barrel. The US Navy has been dispatched to the region to prevent closure. In the 1980s, the Iranians tried to close the Strait of Hormuz, without much success.

Europe and Asia both have more exposure to oil imports flowing through the Strait of Hormuz than the US. On a relative basis, the US economy would likely handle a closure better, as the US is a net energy exporter.

Fixed-Income Takeaways:

The long-term internal Fed forecast for the fed funds rate has moved higher in recent months, from 2.50% to 3.00%, according to Bianco Research. The Fed continues to project approximately 50 basis points of rate cuts between now and the end of 2025. The current fed funds rate is the target range of 4.25% to 4.50%.

At his press conference last week, Fed Chairman Powell’s comments were interpreted hawkishly. The Fed would like to see more evidence of slowing inflation, and the impact of tariffs on inflation, before cutting interest rates further. Powell’s term is set to end in the spring of 2026, which will further complicate Fed policy.

Many fixed income investors are positioning for a steeper Treasury yield curve, expecting short-term rates to fall relative to long-term rates. Short-term rates are more influenced by Fed policy, while long-term rates are more influenced by inflation and global asset flows (including US dollar positioning).

Credit spreads remain narrow relative to history and have settled into a tight range. This indicator continues to point to a stable economy.

Municipal bonds continue to remain attractive for investors in high tax brackets. Recent legislation moving through the House and Senate maintains the municipal tax-exemption (as expected). Defaults remain very low.

“A Pause in the Fog”

The Fed holds steady as uncertainty clouds the path forward

Key Takeaways:

• The Federal Open Market Committee left the target range for the federal funds rate unchanged at 4.25% to 4.50% 
• Fed also forecasts two 0.25% rate cuts for 2025, unchanged from March
• Economic growth is revised down
• Fed continues to emphasize patience and uncertainty
• Balance sheet runoff continues

The Federal Open Market Committee (“FOMC”) held its benchmark interest rate steady at the range of 4.25% to 4.50%, extending its pause for a fourth consecutive meeting in 2025. But beneath the surface of the status quo lies a more complicated story – one marked by slower growth, persistent inflation, and a policy path growing more difficult to read.

Today’s updated Summary of Economic Projections (“SEP”) for June still shows two interest rate cuts penciled in for 2025, maintaining the median outlook from March. But that apparent consistency masks growing internal division; a rising number of FOMC participants now foresee less than two or even zero cuts this year. The once-clear road to easing has become a narrowing trail, surrounded by geopolitical uncertainty and stubborn price pressures.

Powell’s Message:  Data Will Decide

In his post-meeting press conference, Chair Powell emphasized a familiar refrain: patience, flexibility, and vigilance. He acknowledged the Fed’s progress on inflation but stopped well short of declaring victory. “We need greater confidence that inflation is sustainably moving toward 2%,” he said, reiterating that policy decisions will remain data dependent, not calendar-driven.

When pressed on whether two cuts remain realistic this year, Powell avoided commitment, noting that “the risks are two-sided.” He pointed to recent economic crosscurrents: softening consumer spending, improving supply chains, but also tariff-related price pressures and labor market resilience. The implication was clear: the Fed isn’t yet convinced it can cut rates without consequence of re-igniting inflation later.

Slower Growth, Stubborn Inflation

The Fed revised its 2025 GDP growth estimate downward to 1.4%, a notable slowdown from the prior estimate of 1.7%. At the same time, Core PCE inflation remains above target, projected at 3.1% by year-end. The labor market is expected to soften modestly, with unemployment rising to 4.5%, but remains relatively stable by historical standards.

Taken together, the projections paint a portrait of a slow-moving economy with sticky inflation – a mix that justifies the Fed’s reluctance to ease prematurely. It also underscores the challenge of achieving a so-called “soft landing” without leaving policy too tight for too long.

Markets Watch the Dots and the Silence Between Them

While the SEP for the 2025 year-end fed funds rate remains technically unchanged, Powell’s caution and the widening range of views within the Committee are resonating with markets. Treasury yields nudged higher on the day, and the futures markets trimmed their odds of a September rate cut. What markets once viewed as a near certainty is now a question of timing, conditionality, and inflation’s unpredictable path.

What It Means for Investors

The June announcement reinforces a single theme: the Fed is in no rush to cut rates, and investors shouldn’t rush to reposition.

The “higher-for-longer” stance strengthens. Short-term debt and U.S. Treasury Bills remain attractive for income and flexibility. The yield curve could stay flat or even invert further. Consider barbell strategies that balance short-term liquidity with selective long-term exposure. With a rate relief delayed, valuation pressure persists in the equity market. Growth stocks may wobble; defensive sectors gain appeal. Stick to quality. Prolonged high rates challenge lower-rated corporate debt, especially near refinancing windows.  Cash yields are still compelling. Liquid alternatives and ultra-short duration vehicles can help manage volatility while preserving optionality.

The Fed hasn’t ruled out easing, but it’s made it clear it will only do so with conviction, not hope. In this environment, discipline, diversification, and patience matter more than ever.

Still Walking Through the Fog

The June decision offers no surprise in substance, but the context around it has shifted. The Fed remains in a holding pattern, but the grip is tighter and the room to maneuver is narrower. With inflation not yet yielding and growth decelerating, the Fed’s margin for error has grown thin.

The pause continues. But so does the fog.

Key Takeaways:

Last Friday, June 13, Israel attacked Iran’s nuclear and military assets, widening the conflict in the Middle East. To put this into context, we offer the following points:

Previous hostilities between Israel and Iran did not lead to a wider conflict. Such appears to be the “best case” outcome for the current situation, although the level of intensity is a notable increase from the “tit-for-tat” scrimmages that have been ongoing for the past 14+ months.

A protracted, expanded war that draws in the US and others would be a “worst case” outcome, and the larger economic and/or market impact will depend on the scope and duration of the war. Trade-related stresses, supply chain challenges, and additional stagflationary impulses are all possible consequences.

Federal Reserve (Fed) policy is further complicated by this conflict. Additional upward pressure on inflation would make it difficult for the Fed to cut rates. The current fed funds rate is the target range of 4.25% to 4.50%.

Three possible scenarios from the conflict in the Middle East could possibly ensue.

Scenario 1 – conflict remains mostly limited to Israel and Iran: the spike in oil prices abates and does not affect global inflation on a long-term basis; risk assets face short-term downside volatility but recover once it becomes clear the conflict remains contained.

Scenario 2 – prolonged disruption to the energy complex: Iran restricts important trade access and targets US assets; oil pushes to $90/barrel or higher, posing an additional stagflationary shock; market reaction would depend on duration of energy disruptions and/or actions taken to lessen the impact (including potential release of strategic reserves); risk assets would suffer, and safe haven assets would fare best.

Scenario 3 – rapid escalation, quick recovery: US is also drawn into the conflict but, in this scenario, a more severe attack leads to a more punishing response and Iranian capabilities are quickly dismantled; sharp market decline followed by sharp recovery; longer-term uncertainty over the Middle East would persist, however.

Bottom line – how to invest now.

Typically, geopolitical events are short-lived. Typically, other forces such as monetary policy, the health of the labor market, the outlook for inflation, etc., play a larger role on market returns. Last Friday’s market reaction did not show panic. Volatility rose, but did not spike, and inflation expectations remained stable.

Real assets, such as gold and energy stocks, provided important diversification last week – we continue to recommend real assets in client portfolios. Treasuries have been less effective at offering diversification but could be additive if things worsen materially.

When volatility is low, investors should preserve capital. When volatility is high, investors should deploy capital. We continue to watch implied volatility (VIX) and other sentiment indicators for moments to put incremental capital to work. We will continue to highlight these if/when such opportunities present themselves (for examples, please refer to our National Client Call on April 9, 2025).

We continue to believe non-US equities should represent approximately 30% of a total portfolio’s equity exposure. Non-US equities can also help hedge against a falling US dollar.

During last week’s volatility, the US dollar did not fulfill its traditional safe haven role. Further dollar weakness appears likely, highlighting the need for diversification as noted above.

Equity Takeaways:

Global equities rose in early Monday trading. The S&P 500 rose approximately 0.9%, to 6028, while small caps rose a similar amount. International shares were also higher.

Last Friday, the S&P 500 fell a bit over 1%, but there was little panic signified within market internals. Implied volatility (VIX) reached 21, slightly above average, but well below panic levels. For context, during the sharp selloff earlier this year, the VIX crested above 50.

Crude oil prices have been slowly declining since mid-2023. Last week’s rally in oil prices brought us back into the middle of a long-standing trading range. Eventually, we believe crude oil prices will bottom and begin moving higher, but this is a long-term call.

Thus far in this conflict, Israel has attacked Iranian natural gas fields (largely used domestically within Iran) but have largely avoided Iran’s oil export infrastructure. Early in the conflict, Israel appears to be focusing on disrupting Iran’s domestic economy, not their oil exports, further lending support to the argument that this is largely a regional dispute versus something much larger.

The earnings weighting of the energy sector in the S&P 500 is approximately 10%, but the energy sector only comprises approximately 3% of total S&P 500 market capitalization. In other words, the sector has a lot of earnings power relative to its market capitalization.

Investors are unwilling to place a high multiple on energy sector earnings due to negative long-term perceptions around the sector. We believe the gap between energy sector earnings power and market capitalization is likely to close with higher energy stock prices down the road.

Fixed-Income Takeaways:

Treasury yields rose 5-10 basis points across the curve last Friday (June 13) in response to Israel’s attack on Iran. Oil prices rose approximately 8% on the day. Bond investors are likely concerned about rising oil prices and their potential impact on inflation. All else equal, upward pressure on oil prices could push inflation higher, which would put upward pressure on bond yields.

In early Monday trading, yields were essentially unchanged. Overall, 2-year Treasuries were yielding 3.95%, 5-year Treasuries 4.01%, 10-year Treasuries 4.41%, and 30-year Treasuries 4.90%.

A prolonged, wide-ranging conflict in the Middle East could ultimately push investors into safe haven assets, such as Treasuries, which would push yields lower. Such a scenario is not our base case.