RFO Capital CIO Quarterly Letter – Q2 2026

Second Quarter 2026 | Global Markets & Macroeconomic Review 

The second quarter of 2026 delivered one of the most remarkable reversals in recent market history. Investors who entered April braced for a prolonged stagflationary episode left June with equity portfolios at or near record highs, technology stocks resurgent, and oil prices essentially back where they began the year. The speed and completeness of that rotation, driven by de-escalation in the Middle East, a powerful AI earnings cycle, and a remarkable broadening of equity market participation, caught many investors by surprise. 

Yet the quarter was far from simple. Beneath the headline gains lay meaningful tensions: inflation accelerated in April and May, the Federal Reserve underwent a leadership transition at a moment of genuine policy uncertainty, long-end Treasury yields spiked to multi-decade highs, and consumer sentiment fell to an all-time survey low. Q2 2026 was a quarter in which equity markets proved willing to look through near-term pain in anticipation of a more constructive medium-term path. Whether that optimism proves warranted is the central question heading into the second half of 2026. 

Q2 2026 MARKET PERFORMANCE AT A GLANCE 

THREE THEMES THAT DEFINED THE QUARTER

1) The AI Trade Returns With Force

The defining narrative of Q2 was the decisive return of the “artificial intelligence trade”. After a bruising first quarter in which concerns about AI disruption to legacy software models weighed heavily on technology stocks, the earnings season that unfolded through April and May silenced much of the skepticism. Q1 2026 corporate results were the strongest in recent years: 85% of S&P 500 companies beat consensus expectations, the highest “beat rate” since 2021 and well above the long-run average of 73%. 

The hyperscalers drove the story. As a matter of fact, US technology companies collectively raised their 2026 capital expenditure (“capex”) guidance to an impressive US$700 billion, indicating that the AI infrastructure build-out is proceeding at scale despite the on-going geopolitical disruptions. Single-session earnings reactions were extraordinary by any historical measure: Dell rose 32.8% on the day of its results (its best day on record), Snowflake surged more than 36%, and HPE jumped nearly 20%. The technology sector advanced 16% in May alone and accounted for every one of the S&P 500’s ten best-performing names during that month. 

Critically, what began as a narrow technology-led rally broadened materially as the quarter progressed. By quarter-end, small cap, microcap, equal-weight, and value benchmarks had all reached new record highs. Earnings growth expectations for global equities were revised upward by 11 percentage points to 27.6% since the start of the Iran conflict, with information technology leading the revision. Q2 2026 S&P 500 earnings growth forecasts rose from 18.8% at the end of Q1 to 23.1% by quarter close, alongside revenue growth expectations of 12.3% in what would be the highest revenue growth rate since Q2 2022. 

2) The Middle East De-escalates…Oil Reverses

Oil markets provided the most dramatic swing of the quarter. Having peaked above US$118 – US$120 per barrel in late April, a level not seen since 2022, Brent crude fell 19.3% in April and a further 20.8% in May, closing May at US$92.05 per barrel. By quarter-end, the price was essentially back to pre-war levels, having completed a round trip of more than 70% in the span of a single quarter. 

A key driver was the progress of ceasefire negotiations between the US and Iran. A framework built around a 60-day memorandum of understanding emerged as credible through May, even as the Strait of Hormuz remained effectively closed for the full month and late-May strikes by both sides served as a reminder of the fragility of the process. By late June, a ceasefire agreement had led to the reopening of the Strait, removing the most acute near-term threat to global energy supply. The speed with which energy prices reversed after peaking underscores that the Q1 oil move may have been significantly influenced by a “fear premium” rather than solely by fundamental supply destruction. 

The implications for broader markets were profound. Falling oil prices towards the end of the quarter reduced the immediate inflationary impulse, took pressure off long-end Treasury yields, eased the margin outlook for energy-intensive industries, and removed the single largest source of geopolitical risk premium that had been embedded in equity valuations since February. 

3) A New Federal Reserve Chair and a Policy Pivot Debate

The quarter also brought a major institutional transition at the Federal Reserve (“Fed”). Kevin Warsh was confirmed as Fed Chair by the narrowest margin in modern history. A vocal advocate for lower interest rates and an open critic of the institution he now leads, Warsh inherited a committee that was deeply divided at precisely the moment when clarity was most needed. At the final FOMC meeting under Jay Powell, the committee held rates steady but recorded four dissents, the most at a single meeting since 1992. 

At his first meeting as Chair, Warsh struck a tone that surprised markets: hawkish, inflation-focused, and unwilling to offer reassurance that the next move would be a cut. The core PCE, the Fed’s preferred inflation gauge, rose for a third consecutive month to 3.4% in May. With CPI reaching 3.8% in April, its highest since May 2023, with energy responsible for more than 40% of the increase, the inflation backdrop gave him limited room for accommodation. Markets that had begun the year pricing two to three rate cuts in 2026 ended Q2 debating whether the next move might be a hike, with futures briefly assigning a near-zero probability to any rate reduction before year-end. 

The hawkish June FOMC statement had a pronounced effect on the US dollar, which broke out of a 12-month sideways trading range and established what technical analysts interpreted as a potentially durable uptrend. The greenback’s strength, if sustained, will be a meaningful headwind for emerging market assets and multinational earnings in the second half. 

THE MACROECONOMIC BACKDROP 

1) Growth

The global growth picture entering Q2 remained, in the assessment of the IMF and major forecasters, one of solid but unsynchronized expansion. Developed economies were projected to grow at 1.8% in real terms for 2026, while emerging economies were expected to expand at 4.4%, with emerging Asia continuing to benefit from AI-related demand. The US economy showed resilience despite the energy shock, with the broader consumer held up by higher-income households while lower-income cohorts continued to display meaningful strain, a so-called K-shaped dynamic that has defined the post-pandemic recovery. 

One of the more significant positive surprises of the quarter was the strength of Q1 2026 corporate earnings, which served as a forward-looking signal for underlying economic health. Revenue growth of 9.2% and earnings growth of 13.6%, both above expectations, reinforced confidence that corporate America’s productive capacity remains intact. Looking ahead, the risk to the growth outlook centers on the persistence of higher energy costs as a tax on consumer spending and business margins, and the degree to which tighter financial conditions associated with higher long-end rates dampen investment activity. 

2) Inflation

Inflation was the most complex and consequential macro variable of the quarter. The trajectory was uncomfortable through April and May: headline CPI reached 3.8% year-on-year in April (the highest since May 2023), with energy accounting for more than 40% of the monthly increase and gasoline up more than 28% year-on-year. Core PCE rose for three consecutive months to reach 3.4%. Real average hourly earnings declined as inflation outpaced wage growth for the first time in three years, and the personal saving rate fell to 2.6%, its lowest since mid-2022. 

The consumer confidence picture was striking. The University of Michigan sentiment index fell to 44.8 in May, an all-time low in a survey dating back to 1952, surpassing even the trough of mid-2022. The survey’s director attributed the deterioration to persistent high gasoline prices and broader cost-of-living concerns, with year-ahead inflation expectations rising to 4.8%. This is a number that policymakers cannot ignore, and it may explain much of Chair Warsh’s hawkish posture at the June FOMC meeting. 

The ceasefire and oil price reversal in June provide a potential “disinflationary” impulse heading into the second part of the year, but the stickiness of shelter costs, services inflation, and wage dynamics means the path back to 2% remains a multi-year journey rather than an imminent destination. 

3) Labor Markets

Labor market data through Q2 presented a picture of resilience at the aggregate level, with private payroll growth healthy and the unemployment rate steady at 4.3%. However, average hourly earnings growth for all workers rose just 3.5% in May, the second-smallest gain in five years, a development that is simultaneously welcome for the inflation outlook and concerning for consumer spending power in a period of elevated price levels. With real wages briefly turning negative in April, the burden on lower-income households was acute, as evidenced by the continued rise in consumer delinquency rates observed in Q1 data. 

4) Fixed Income & Credit

The bond market was the site of the quarter’s most pronounced volatility. The 30-year Treasury yield spiked to 5.18% on May 19, its highest level in nearly 19 years, as fears of a sustained energy shock and fiscal deterioration drove term premium higher. Yields subsequently eased back toward 5% as ceasefire momentum grew and oil prices fell. The yield on the 10-year Treasury ended May with little net change for the month, though the path to that outcome involved significant intra-quarter turbulence. The Bank of Japan delivered a widely expected rate hike to 1% in June, with strong wage growth and 6.3% year-on-year producer price inflation maintaining a hawkish bias. 10-year Japanese Government Bond yields reached 2.7% by quarter-end, with JGBs returning -1.3% for the period. 

In credit markets, the contrast between the volatility in the rates complex and the calm in spread markets was conspicuous. High-yield spreads tightened modestly to around 274 basis points, with only a brief widening around the May 19 yield spike. Investment grade spreads held near the tight end of their multi-decade range. Strong corporate earnings, low default expectations, and healthy demand for income kept spreads compressed even as the risk-free curve moved considerably. It is worthwhile to mention that spreads at these levels may leave very little cushion should the growth picture deteriorate. 

4) Capital Markets Activity

One notable development of the quarter was the successful launch of SpaceX as a public company in June, described by market participants as the largest IPO in history, which was absorbed by markets with relative ease, a testament to the breadth of investor risk appetite even in an uncertain macro environment. A pipeline of AI-adjacent and technology IPOs is expected through the remainder of 2026, which will both test market capacity for new issuances and keep the AI investment narrative front-and-center for investors. 

PORTFOLIO POSITIONING & OUR CURRENT THINKING 

The quarter has reshuffled the deck in important ways. Our convictions heading into the second part of the year are: 

• The AI capex cycle is real and still early. The US$700 billion hyperscaler capex commitment is not a rounding error; in our view, it represents a structural shift in global capital allocation towards AI infrastructure. The Q1 earnings season supported this thesis.  
• Breadth is a healthy sign, but concentration risk is returning. The broadening of market participation in Q2 was genuinely encouraging. Yet by quarter-end, there were early signs that leadership was narrowing again toward AI-adjacent technology names. The June pullback of approximately 1% in the S&P 500, driven by concerns that the AI rally had run ahead of near-term fundamentals, is a reminder that episodic corrections within a broader advance remain entirely plausible. 
• Duration risk merits careful management. The 30-year Treasury yield touching 5.18% in May, was a signal, not just a data point. With the Fed’s policy direction genuinely uncertain under new leadership, fiscal deficits widening, and inflation above target, the case for significant duration extension is weak.  
• The ceasefire is progress, not resolution. The Middle East de-escalation was a constructive development that removed the most acute tail risk from our outlook. However, the Strait of Hormuz was effectively closed for the entire month of May, and late-month strikes from both sides demonstrated the fragility of the peace process.  
• International equities offer relative value. With the S&P 500 at approximately 20.1x forward earnings and TOPIX posting a 14% quarterly gain, selective international exposure remains attractive. European equities rallied on Middle East de-escalation and resilient economic sentiment, with the Eurozone manufacturing PMI sustaining above 50. Emerging market equities, particularly those in Asia with structural AI demand tailwinds, merit attention, though USD strength and energy import exposure remain key risks to monitor. 
• Consumer vulnerability is underappreciated. The University of Michigan sentiment reading of 44.8, an all-time low, is not a trivial data point in our opinion. With real wages briefly negative, saving rates at multi-year lows, and delinquency rates elevated, the health of the broad consumer is more fragile than equity market performance suggests. 

CLOSING REMARKS

Last quarter demonstrated, once again, that the most important investment decisions are rarely made in the moments of maximum clarity. The investors who maintained their AI infrastructure exposure through the disruption of Q1, who held equity positions when recession risk was priced at 37%, and who recognized that the Middle East conflict, while severe, was unlikely to be a permanent feature of the global landscape, were rewarded with one of the strongest quarterly returns in years. 

The path into the second half of the year is not without complexity. Inflation is not yet under control. The Federal Reserve’s direction under new leadership is genuinely uncertain. The geopolitical situation, while improved as at end of Q2, is not resolved. And equity valuations, while supported by earnings growth, leave limited room for disappointment. 

In this environment, our philosophy remains unchanged: disciplined diversification in our portfolio construction. The markets will continue to present us with surprises; our goal is to ensure that portfolios are positioned to absorb them constructively. 

As always, we remain available to discuss your portfolio positioning and outlook in detail.  

Yours sincerely,
Anik Lanthier
Chief Investment Officer, RFO Capital
July 2026 

This letter is provided for informational purposes only and does not constitute investment advice or a recommendation for any particular investor, security, strategy or investment approach. This letter is provided for informational purposes only and does not constitute investment advice. The views, opinions, expectations and outlooks expressed herein are those of RFO Capital Inc. as of the date of publication and are subject to change without notice, and RFO Capital undertakes no obligation to update them. Any forward-looking statements are subject to risks and uncertainties, and actual outcomes may differ materially. All market data referenced reflects publicly available information through June 30, 2026. Market data and other information have been obtained from sources believed to be reliable, but their accuracy and completeness cannot be guaranteed. Past performance is not indicative of future results.