Key Wealth Investment Brief

Key Takeaways

We revisit three of our tactical asset allocation recommendations and why we believe they will continue to outperform.

Over the past 18 months, three tactical asset allocation recommendations have been in place: (1) De-emphasize the “Magnificent 7” (Mag 7) stocks and emphasize the “Forgotten 493”; (2) De-emphasize mega-cap U.S. equities and emphasize mid/small-cap U.S. equities; and (3) Remove the overweight to U.S. equities and increase exposure to non-U.S. equities back to neutral versus our strategic allocation. 

We believe both de-emphasizing the Mag 7 stocks and de-emphasizing mega-cap U.S. equities will benefit from continued rising capital expenditures of mega-cap companies as they focus on building the infrastructure needed for artificial intelligence (AI). This build-out has led to a significant decline in free cash flow at these companies, and the decline looks likely to deepen. Additionally, the Mag 7 stocks have commanded a noticeably higher valuation premium, creating a more difficult environment for future returns relative to the “Forgotten 493.”

The removal of the overweight to U.S. equities will continue to be supported by the cheaper non-U.S. valuations relative to the U.S. equity markets. Compared to the S&P 500, the MSCI ACWI ex-U.S. Index is trading at a 33% valuation discount. Historically, the Index trades at a 20% discount to the S&P 500. This expanded discount creates an opportunity for international stocks to outperform. International stocks are also delivering accelerating earnings growth similar to the U.S., and analysts expect this growth to continue, providing another catalyst for strong performance.

New research explains why the oil shock from the Iran War was not as bad as originally feared.

When the Iran War first started and the Strait of Hormuz closed, oil prices spiked to their highest level since Russia invaded Ukraine. Despite these elevated prices, the U.S. economy did not experience a slowdown. Two of the primary reasons for this are: (1) the fact that the U.S. is now a net exporter of oil and (2) our economy is much less dependent on energy relative to the past, according to the U.S. Energy Information Administration and the Federal Reserve Bank of Dallas. New research also found one additional reason for the lighter shock, a rise in tax refunds. Due to the new deductions available and over-withholding, the IRS issued refunds totaling $312.9 billion, an increase of 17.8% from the prior year, according to the IRS. This increase in refunds helped consumers offset the increase they experienced at the gas pump and allowed them to continue to spend similarly to the way they were before the war began.

Bottom Line – how to invest now.

We expect volatility to remain elevated, and we continue to advocate for robust diversification. Bonds may continue to struggle to add ample diversification amidst an environment of larger federal deficits and higher interest rates. Bonds may show higher correlations with stocks in such an environment, leading to less portfolio diversification.

Even before the Iran War, we held the view that inflation could be persistent (due to rising nationalism along with other forces). The Iran crisis adds a material new source of risk, and although we don’t see history repeating itself in lock-step with the 1970s, investors may want to maintain allocations to real assets after the conflict ends.

Another argument for diversification: the S&P 500 index has become much more concentrated. In 2006, the S&P 500 had approximately 35% exposure to growth stocks, 39% blend, and 26% value, according to data from Bank of America (BofA). In 2026, the S&P 500 holds 46% growth stocks, 42% blend, and only 11% value stocks, according to BofA. We also note that international markets may also provide additional diversifying qualities and believe opportunities exist beyond large cap growth equities.

In sum, real investors need real assets, and U.S. investors need exposure beyond U.S. financial assets and concentrated indexes.

Equity Takeaways:

Stocks were mixed in early Monday trading. The S&P 500 rose approximately 0.5%, to 7392, while the tech-heavy Nasdaq rose approximately 0.8%. Small caps fell approximately 0.3%. Non-U.S. stocks were mixed.

The S&P 500 finished last week down approximately 2.0%; year-to-date, the Index is up 8.0%. Strong first quarter earnings announcements have driven the majority of returns so far this year.

Investors will turn their attention to second quarter earnings starting in two weeks. What is our outlook for earnings going forward? We believe the momentum will continue with some moderation.

The Magnificent 7 stocks have struggled lately as the AI build-out continues to deplete their free cash flows. However, investors are not fleeing the market, they are just rotating their money into the AI enablers. 

The momentum factor has been the top performing factor this year, pulling away from the others since March. This outperformance, along with a risk-on market attitude, led to extreme crowding into the momentum and low-quality factors, with both factors having reached the 99th percentile of crowding. 

Fixed-Income Takeaways:

Yields fell across the curve last week, with the belly of the curve experiencing the biggest decreases. Specifically, at the short end, 2-year yields moved 9 basis points (bps) lower, closing the week at 4.09%; longer out on the yield curve, 10-year yields moved 8 bps lower to close the week at 4.37%, while 30-year yields moved 4 bps lower to close the week at 4.86%. 

The drop in yields is likely attributed to increased confidence that inflation will begin a deceleration trend. Comments made by Treasury Secretary Scott Bessent about “being on the other side of the Iran War” helped drive the rise in confidence.

In early Monday trading, yields were mostly unchanged: 2-year Treasury yields were trading at 4.10%, 5-year Treasury yields at 4.14%, 10-year Treasury yields at 4.37%, and 30-year Treasury yields at 4.86%.

Investment grade and high yield credit spreads rose last week. SpaceX made its debut bond sale last week, issuing $25 billion worth of bonds in five tranches. 

Key Takeaways

Kevin Warsh makes his mark at his first FOMC meeting.

Last week, newly confirmed Federal Reserve Chair Kevin Warsh led his first Federal Reserve Open Market Committee (FOMC) meeting, where the Committee unanimously held the interest rate target range unchanged at 3.50% – 3.75%. More newsworthy was the fact that the new Chair ushered in a new communication strategy and possibly a new monetary policy strategy.

Warsh had previously pushed back against the communications coming from the Committee and provided a preview of his new approach, as the statement following the meeting was considerably shorter than past versions. The statement also no longer provided explicit guidance regarding the future direction of policy, but by stating that “The Committee will deliver price stability,” the Committee offered a direct message that inflation is their primary concern.

The meeting also provided the release of the FOMC’s updated Summary of Economic Projections (SEP). Compared to their previous release in March, the new projections showed members expect slightly slower growth this year and significantly higher inflation this year and next year. Most notably, the release showed more than half of the members expect at least one interest rate increase this year. It was also notable that Kevin Warsh did not provide a projection for future rates.

Despite the Strait of Hormuz reopening, we do not expect the oil market to return to normal anytime soon.

The signing of the U.S.-Iran memorandum of understanding officially reopened the Strait of Hormuz to commercial vessels. While the number of vessels passing through the Strait each day has risen, it is still well below pre-war levels. Even when traffic through the Strait returns to normal, oil prices are unlikely to quickly fall back to pre-war levels. Based on the oil futures curve, market participants are expecting the price of oil to gradually fall over the next few years but remain above pre-war forecasts until at least 2031. Still, relief at the gas pump will be welcome news to most consumers.

In the U.S., strategic petroleum reserves reached their lowest level since 1983, at approximately 340 million barrels. In addition, inventories at Cushing, the largest commercial crude oil storage in the U.S., fell to 20 million barrels, which is equivalent to less than two days of American crude production. Countries around the globe saw their reserves similarly depleted and now must reconsider how much they actually need to keep in their strategic reserves going forward. 

Analysts and investors remain bullish on stocks, but there are other areas where bearishness is rising. 

Equity analysts are more bullish on stocks than at any other time in the past 15 years. Stocks in the S&P 500 have 12,840 analyst ratings. Of those, only 4.9% have a “Sell” rating while 59.4% have a “Buy” rating, the highest percentage since at least 2009, according to FactSet. Analysts are not the only bulls: investors continue to pile into U.S. stocks, with Tech stocks seeing most of those inflows. 

Despite the optimistic outlook on equities, economic anxiety is rising. A recent Wall Street Journal poll found that across the income spectrum, there are rising concerns about current finances, the years ahead, and the prospects for future generations. 

Bottom Line – how to invest now.

We expect volatility to remain elevated, and we continue to advocate for robust diversification. Bonds may continue to struggle to add ample diversification amidst an environment of larger federal deficits and higher interest rates. Bonds may show higher correlations with stocks in such an environment, leading to less portfolio diversification.

Even before the Iran War, we held the view that inflation could be persistent (due to rising nationalism along with other forces). The Iran crisis adds a material new source of risk, and although we don’t see history repeating itself in lock-step with the 1970s, investors may want to maintain allocations to real assets after the conflict ends.

Another argument for diversification: the S&P 500 index has become much more concentrated. In 2006, the S&P 500 had approximately 35% exposure to growth stocks, 39% blend, and 26% value, according to data from Bank of America (BofA). In 2026, the S&P 500 holds 46% growth stocks, 42% blend, and only 11% value stocks, according to BofA. We also note that international markets may also provide additional diversifying qualities and believe opportunities exist beyond large cap growth equities.

In sum, real investors need real assets, and U.S. investors need exposure beyond U.S. financial assets and concentrated indexes.

Equity Takeaways:

Stocks were mixed in early Monday trading. The S&P 500 rose approximately 0.2%, to 7515, while the tech-heavy Nasdaq was unchanged. Small caps rose approximately 0.5%. Non-U.S. stocks were mixed.

The S&P 500 finished last week up approximately 0.9%. Investor sentiment remained high as corporate earnings projections continued to rise. The S&P 500 earnings per share is currently sitting just below $365, and its growth has been accelerating in recent months, bringing $400 by year-end firmly in the realm of possibilities.

Investors have remained bullish on U.S. equities, highlighted by the funds flowing into the asset class. According to BofA Global Research, U.S. equities are on pace to see inflows of $739 billion dollars this year, nearly doubling last year’s number. However, the market remains concentrated in artificial intelligence (AI)-related stocks, as the 10 largest holdings in the S&P 500 account for approximately 40% of the cap-weighted index.

Fixed-Income Takeaways:

Yields experienced a bear-flattening last week, as short-term yields rose and long-term yields fell. Specifically, at the short end, 2-year yields moved 10 bps higher, closing the week at 4.18%; longer out on the yield curve, 10-year yields moved 3 basis points (bps) lower to close the week at 4.45%, while 30-year yields moved 7 bps lower to close the week at 4.90%.

The change in short-term yields was almost entirely due to the FOMC meeting and the release of their updated SEP, which showed rate cuts are off the table for this year. Long-term yields were likely lowered by the U.S. and Iran peace deal announcement.

In early Monday trading, yields were higher across the curve: 2-year Treasury yields were trading at 4.22%, 5-year Treasury yields at 4.27%, 10-year Treasury yields at 4.49%, and 30-year Treasury yields at 4.93%.

High-yield credit spreads compressed slightly last week, and investment grade spreads held steady. Markets experienced $36 billion in Investment Grade issuance last week, including $25 billion from Nvidia.

Key Takeaways

• The Federal Reserve unanimously left the federal funds target rate range unchanged at 3.50% – 3.75%.
• The policy statement was noticeably shorter, and much of its prior forward guidance was removed.
• The June Summary of Economic Projections (SEP) reflected a more hawkish outlook, with higher inflation expectations and a higher policy rate path.
• Eighteen of nineteen participants submitted policy rate projections: the new FOMC Chair, Kevin Warsh, did not. His silence reverberated broadly.
• Warsh repeatedly emphasized the Fed’s commitment to price stability and the pursuit of truth.
• The Fed is launching a review of its communications framework, including forward guidance.
• While the SEP leaned hawkish, Warsh’s press conference suggested a more data-dependent and less forecast-driven approach to policymaking.

Rate Decision: Unanimous Hold

The Federal Open Market Committee (FOMC) voted unanimously to leave the federal funds target rate range unchanged at 3.50%–3.75%.

While the decision itself was widely expected, the unanimity of the vote was notable given the broader debate surrounding inflation, growth, and the future path of monetary policy. The Committee continues to believe current policy remains appropriately restrictive as inflation gradually moves toward its long-run objective.

Statement: Cut the Guidance

The most significant change in the policy statement was content that was removed.

Compared with April’s statement, the Committee substantially shortened the text and eliminated language that previously provided explicit guidance regarding the future direction of policy. Rather than signaling a likely path for rates, policymakers emphasized a meeting-by-meeting approach guided by incoming economic data.

These changes suggest a deliberate effort to reduce reliance on forward guidance and return greater flexibility to the policymaking process, something we forewarned in previous essays on this topic. Markets received a clear message that future decisions will depend on realized economic outcomes rather than pre-announced policy intentions.

SEP Changes: A More Hawkish Outlook

The updated Summary of Economic Projections reflected a somewhat more challenging economic backdrop than earlier in the year.

Policymakers generally revised inflation projections higher while marking down expectations for economic growth. The revisions suggest that progress on inflation may take longer than previously anticipated and that the economy may slow as restrictive monetary policy continues to work through the system.

The SEP reinforced the Committee’s view that inflation remains the primary challenge bedeviling policymakers and that a return to price stability may require policy to remain restrictive for longer than investors had previously expected.

Dot Plot: Less Consensus, More Uncertainty

The June “dot plot” highlighted a growing divergence of views across the Committee and reinforced the message that the future path of policy remains uncertain. Eighteen of nineteen participants submitted projections for the federal funds rate, while new FOMC Chair Warsh declined to participate in the exercise, consistent with his previously stated reservations about the SEP framework.

Compared with March, the distribution of forecasts widened noticeably. While the median projection shifted modestly higher, signaling a somewhat more cautious approach toward future rate cuts, the broader range of outcomes revealed less agreement about where policy should ultimately settle. Notably, nine participants projected a higher policy rate by year-end, including one participant who anticipated three rate increases.

Rather than providing a clear roadmap for policy, the dot plot underscored the uncertainty surrounding the inflation outlook, economic growth, and the appropriate degree of monetary restraint. The wider dispersion of projections suggests that policymakers are operating with less conviction around a single economic narrative and greater recognition that multiple outcomes remain possible.

Perhaps most noteworthy was Chair Warsh’s decision not to submit a projection. While he encouraged other Committee members to continue participating, his absence from the dot plot reinforced his comments made during the press conference that monetary policy should remain focused on the pursuit of price stability and be guided by incoming economic data rather than by publishing individual forecasts years into the future.

Warsh’s First FOMC Press Conference: Price Stability First

Chair Warsh’s first post-meeting press conference offered important insight into how he intends to lead the institution.

Throughout the discussion, Warsh repeatedly emphasized that the Federal Reserve’s responsibility is price stability. Notably absent from many of his remarks was the traditional emphasis on balancing inflation and employment objectives, commonly referred to as the Fed’s “dual mandate.” Instead, he returned frequently to the need for restoring confidence in the Fed’s inflation-fighting credibility.

Warsh also announced a series of new task forces on key aspects of monetary policy and Federal Reserve operations, noting that most, if not all, are expected to complete their work by year-end. Among them is a communications review that will examine issues including forward guidance and broader public communications practices.

When asked about his decision not to submit a dot plot projection, Warsh indicated he does not support participating under the current SEP framework, though he encouraged other Committee members to continue doing so. The decision reflects his broader view that policy should be informed by evolving economic conditions rather than distant forecasts.

Particularly relevant, Warsh said, “By the time we get to the end of this year, as I mentioned, I wouldn’t be surprised if there was a new communications framework, [that] there were some changes to the SEP.”

He also remarked that press conferences are valuable when policymakers have something important to say – a subtle but notable departure from the increasingly routine communications approach of recent years.

What This Means for Investors

The June meeting marked less of a change in policy and more of a change in framework, something we previewed in some of our recent writings about the Fed.

The Committee held rates steady but removed much of the guidance investors have become accustomed to receiving. The SEP reflected lingering inflation concerns, while the dot plot revealed greater disagreement among policymakers about the path forward.

Most importantly, Chair Warsh appears focused on reshaping how the Federal Reserve communicates with markets. The emphasis on price stability, reduced reliance on forward guidance, skepticism toward the current dot plot framework, and ongoing communications review all point toward a Fed that may become less predictable in its messaging but more disciplined in its policy objectives. As a result, investors would be wise to anticipate greater volatility and should remain disciplined and diversified.

Key Takeaways

U.S. and Iran have reached a deal to stop fighting and reopen the Strait of Hormuz.

Late Sunday, President Trump announced that an interim peace deal has been reached that will extend the ceasefire for 60 days and reopen the Strait of Hormuz. Iranian officials have also confirmed this. During the 60-day ceasefire, the two sides will work to create a long-lasting peace deal that will likely include a limit on the Iranian nuclear program in exchange for the U.S. lifting economic sanctions on Iran. The deal is set to be signed on Friday in Switzerland. The market has responded positively to the news, but we remain cautious as many unresolved issues remain, including the continued conflict between Israel and Hezbollah coupled with the fact that it will take considerable time to rebuild energy-related infrastructure that was damaged or destroyed during the 4-month-long conflict. 

SpaceX, we have lift off.

Space Exploration Technologies, more commonly known as SpaceX, debuted last week as the largest IPO in history. After an increase of approximately 20% on its first day of trading, the company is now the sixth most valuable company in the world. The company is also one of the most highly valued stocks, with a price-to-sales ratio of 109. Historically, technology companies have had a broad range of outcomes following their IPO. According to data compiled by Renaissance Macro, returns over the first year have ranged from -94% to +213%, with a median return of -15.7%. In other words, once a high-profile company becomes public and customarily enjoys a one-day “pop,” longer-term returns are more nuanced based on a company’s fundamentals versus investor flows.

Diversification has become underappreciated. 

In recent years, market performance has been largely driven by a smaller number of companies, leading some investors to disregard diversification within their portfolio. We believe investors would be better served to embrace more diversification (not less). In the words of a Wall Street Journal columnist and accomplished author: “The point of diversification isn’t to own assets that all go up in price at the same time. If you do, they’re also likely to go down at the same time. Instead, you should own assets that go up and down at different rates and at different times. In the long run, that reduces your risk — and that’s what diversification is for.”

If you are worried about high concentration and high valuations in the U.S. stock market, diversification can help. One area that could particularly help with diversification is European equities, which have significantly lower valuations and concentration relative to U.S. markets. While these lower valuations are warranted due to the region being a clear laggard in the AI arms race, exposure is still warranted, as the lack of AI exposure could be beneficial in a downturn. Moreover, many European economies are proving more dynamic than some investors may perceive. 

Kevin Warsh is set to lead his first F.O.M.C meeting as the bond market pushes back against interest rate cuts.  

Kevin Warsh will chair his first Federal Open Market Committee (F.O.M.C.) this week as the Committee meets June 16-17. Warsh has publicly stated he believes interest rates should be lower, however many other members of the F.O.M.C. and the bond market disagree. Market participants expect rates to remain unchanged, but they would not be surprised to see a change in the Committee’s statement, moving from an easing bias to a neutral bias.

The meeting will also see the release of the updated Summary of Economic Projections (SEP). The last SEP showed members were forecasting two interest rate cuts this year. 

Bottom Line – how to invest now.

We expect volatility to remain elevated, and we continue to advocate for robust diversification. Bonds may continue to struggle to add ample diversification amidst an environment of larger federal deficits and higher interest rates. Bonds may show higher correlations with stocks in such an environment, leading to less portfolio diversification.

Even before the Iran War, we held the view that inflation could be persistent (due to rising nationalism along with other forces). The Iran crisis adds a material new source of risk, and although we don’t see history repeating itself in lock-step with the 1970s, investors may want to maintain allocations to real assets after the conflict ends.

Another argument for diversification: the S&P 500 index has become much more concentrated. In 2006, the S&P 500 had approximately 35% exposure to growth stocks, 39% blend, and 26% value, according to data from Bank of America (BofA). In 2026, the S&P 500 holds 46% growth stocks, 42% blend, and only 11% value stocks, according to BofA.

In sum, real investors need real assets, and U.S. investors need exposure beyond U.S. financial assets and concentrated indexes.

Equity Takeaways:

Stocks were positive in early Monday trading. The S&P 500 rose approximately 1.4%, to 7537, while the tech-heavy Nasdaq rose approximately 2.4%. Small caps rose approximately 1.6%. Non-U.S. stocks were mixed.

After nine straight weeks of gains, the S&P 500 experienced back-to-back down weeks. We view this pullback as a healthy reset for the market as we head into summer. Despite the market-cap weighted S&P 500 falling last week, the S&P 500 Equal Weight Index moved higher, ending the week at a new all-time high, validating our thesis that market advances would be broad-based. The last two weeks also saw a rise in volatility, as the Cboe Volatility Index (VIX) ended the week at 17.7. This was not a volatility explosion, just merely a return to the index’s long-term average.

Earnings continue to be the driving force behind index returns. The S&P 500 earnings are adding roughly $1.50 each week, meaning if we maintain the current pace, we will end the year with earnings per share at more than $400. In our view, this squarely brings a move to 8000 into the range of likely outcomes. 

Fixed-Income Takeaways:

Yields experienced a bull-steepening last week, as short-term yields fell by more than long-term yields. Specifically, 10-year yields moved 5 basis points (bps) lower to close the week at 4.48%, while 30-year yields moved 3 bps lower to close the week at 4.97%. At the short end, 2-year yields moved 7 bps lower, closing the week at 4.08%.

Yields initially jumped as the CPI report showed inflation jumped above 4% for the first time since 2023 and hostilities between the U.S. and Iran reignited. However, yields came down to end the week after the U.S. announced a halt to further strikes. 

In early Monday trading, yields were slightly lower across the curve: 2-year Treasury yields were trading at 4.04%, 5-year Treasury yields at 4.17%, 10-year Treasury yields at 4.45%, and 30-year Treasury yields at 4.95%.

Credit spreads compressed slightly last week and remained well below historical averages and are not showing any signs of economic concern. Markets experienced $30 billion in Investment Grade issuance last week, bringing the year-to-date issuance total to more than $1 trillion.