Newsletter
Dear Client,
The first half of 2026 was marked by noteworthy volatility in U.S. markets, driven by intensifying geopolitical conflict in the Middle East, spiking energy prices, persistent inflation fears, and a cautious Federal Reserve. These tumultuous events prompted a 9+% selloff in March, with the S&P 500 dropping almost into correction territory. But before long, stocks bounced in a V-shaped recovery, with the index hitting fresh all-time highs and climbing solidly into positive territory for the year.
The resilience of the U.S. equity market should be attributed to, in large part, a solid macro backdrop, fiscal stimulus, and the ongoing investment boom in artificial intelligence. The strength and breadth of corporate earnings also helped validate the market fundamentals. Equity leadership has begun to broaden beyond mega-cap technology, even as AI remains a prevailing force. Demand for everything in the AI “ecosystem” has triggered monumental capital spending from hyperscalers and AI platform providers. While consumer spending has also been robust, the consumer remains largely bifurcated, with high-income households reaping the benefits of record high equity markets and elevated home values, permitting spending activity to remain strong despite higher prices.
The Federal Open Market Committee held the federal funds rate steady in the 3.50%-3.75% range across all four of its meetings thus far in 2026. Policymakers cited solid growth but highlighted elevated uncertainty from energy-driven inflation and geopolitics. Market rate expectations repriced drastically, moving from 1-2 rate cuts early in the year, to anticipating 1-2 rate hikes by the end of the year. A more-hawkish Federal Reserve and heightened inflation risks pressured rates markets with the yield on the 10-Year U.S. Treasury Note rising from 3.94% in the end of February, to 4.66% where it peaked out in the middle of May. Bonds delivered muted total returns in the first half of the year, with the Bloomberg U.S. Aggregate Bond Index gaining less than 1% as credit spreads widened temporarily, but subsequently tightened along with the equity recovery. Fixed income investors will likely remain wary as concerns around fiscal deficits, increased Treasury issuance, long-term yields, inflation pressures, and central bank credibility all look to contribute to volatility.
New Fed Chair Kevin Warsh, who assumed office in late May, faces a challenging environment given that headline PCE inflation, the Fed’s preferred inflation gauge, has surged 4.1% year-over-year as of June. The risks to inflation in the near-term appear to be skewed to the upside as the conflict in the Middle East is in the midst of ramping back up. The Fed has missed its 2% inflation target for more than five years now, and while Warsh is under considerable political pressure to lower rates, he will have to raise rates to shore up institutional credibility and anchor inflation expectations.
Looking ahead, the balance of 2026 will likely be influenced by several fluctuating macro factors. For now, we remain constructive on risk assets, but are cautious of the magnitude and velocity of the recovery in equities. In fixed income, we maintain a defensive posture, favoring the highest quality cohorts of the market, specifically Agency MBS, short-term investment grade municipal bonds, and short-term U.S. Treasuries. While markets have absorbed numerous shocks throughout the year, the outlook is less certain. As always, we thank you for your continued trust.
Regards,
Edge Wealth Management
Regards,
Edge Wealth Management
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