The CAISSA Quarterly Economic Update – 2nd Quarter End

Welcome to CAISSA’s Quarterly Considerations. We’ll spend some time reflecting back on the quarter and discussing what worked and what didn’t, as well as the outlook for the economic backdrop for the rest of the year. Let’s go ahead and get started. Here’s our disclosure again. It’s small, it’s quick. Read as you will.

Starting off with some market themes, looking at quarterly earnings coming in, you can see the first quarter earnings coming in real strong at 23.8 this year, and some quarterly estimates going forward through the rest of the year also looking to be really strong. That is to highlight the true engine behind the market’s recovery, which is corporate profitability. A strong earnings backdrop really did help the rally. The first quarter results released during the second quarter grew almost 30% year-over-year and marked the sixth consecutive quarter of double-digit earnings growth, with expectations remaining for the rest of the calendar year to be really good and really strong. Investors were responding because earnings growth was sustainable and ultimately supports higher company values over time.

While elevated valuations leave less room for disappointment, the broader message is encouraging. Strong businesses continue to produce strong results despite all the uncertainty that’s out in the markets and in the economy. For long-term investors, earnings remain one of the most reliable drivers of market performance. The economic data shown here really does reinforce why markets became more constructive during this quarter. Citing the surprise index, the picture remains pretty favorable. Consumer spending remained healthy, employment stayed resilient, and recession fears pretty much faded. Inflation does remain above the Federal Reserve’s long-term objectives, but the overall backdrop continued to support the economic expansion that we’re seeing. Rather than signaling perfection, this illustrates that we have an economy that has remained surprisingly durable, which helps explain why investors became a little bit more comfortable owning risk-on assets.

Turning our attention to oil and some inflation expectations, Brent oil has been increasing and decreasing rapidly. In this six-month chart, alongside the US breakeven inflation rate moving in conjunction, oil prices show how quickly markets shift their focus to geopolitical tensions once they begin to ease and all the volatility in between. Oil prices retreated as supply concerns diminished, and the reopening of the Strait of Hormuz reduced the fears of prolonged disruption, with Brent crude retreating to about $70 a barrel by quarter end.

History suggests that geopolitical events frequently create short-term volatility, but markets ultimately refocus on corporate earnings and economic activity. The lesson for investors is not to ignore geopolitical risk, but to recognize that its long-term market impact is often less significant than the headlines suggest. Since the end of June, the Strait of Hormuz has come back into play and shut down again, causing market volatility that we’ll continue to watch.

The quarter was also filled with other news, including an IPO craze with SpaceX joining the indexes. Despite the initial hype and large market cap coming into the indexes, the low float available to the market resulted in a relatively low exposure within the market indexes where it was included. SpaceX ranked about 51st within the Russell 1000 at the end of the quarter with a weighting of roughly 0.2%, despite being the 6th largest company by full market cap. More float will become available as lockups expire (usually 180 days), but the initial impact for these mega-cap IPOs on the market is likely pretty small for now.

Looking at performance in the second quarter year-to-date versus quarter-to-date, leadership for returns broadened beyond a handful of large tech companies (the “Magnificent 7”). Small-cap stocks, developed markets, and emerging markets all participated in this rally. Broader participation generally reflects improving confidence in the economy and creates a healthier market environment than one driven by just a few companies. That diversification allows investors to participate as leadership rotates.

The second quarter was a story of recovery as markets rebounded sharply from first-quarter conflict-driven sell-offs. Easing geopolitical tensions, resilient corporate earnings, and renewed demand tied to AI propelled equities higher. The S&P 500 rose about 15% last quarter, while emerging markets led global equities, and US small-caps outpaced large-caps. Fixed income produced modest gains, and commodities gave back a portion of their first-quarter run.

Focusing on fixed income, US Aggregate rose about 0.7% for the quarter despite interest rates rising. High-yield bonds were a standout within fixed income, up 2.5% in the quarter, supported by strong investor interest in risk-on trades. The Bloomberg US Corporate High Yield Index rose 2% as credit spreads compressed. High-quality fixed income helped stabilize portfolios, while corporate credit benefited from improving investor confidence, demonstrating that diversification across stocks and bonds continues to provide value even as yield curves shift.

Looking at equity sectors, the S&P 500 rose 15% during the second quarter with positive results in almost all underlying sectors. Information Technology led the way as the AI theme remained dominant, with semiconductor companies like Micron Technology and Intel seeing massive gains. Emerging markets were driven primarily by South Korea and Taiwan—which account for over 40% of the EM index—benefiting from the global AI supply chain and hardware cycle. Developed markets also rose about 10.8% during the quarter.

Finally, regarding real assets, commodity prices weakened as geopolitical concerns faded at the end of Q2, dropping roughly 8% over the year due to energy weakness. However, REITs advanced broadly over the second quarter, particularly in lodging and office sectors due to strong travel demand and robust leasing activity.

To wrap up, headlines change quickly, but long-term outcomes continue to be shaped by earnings, economic fundamentals, diversification, and disciplined decision-making. Historically, investors who remain focused on the long term and stick to a strategic plan rather than making knee-jerk decisions win out in the end. Beneath the geopolitical noise, the macro backdrop remains supported by healthy consumer spending, a solid labor market, strong corporate fundamentals, and ongoing AI infrastructure investments.

Thank you for spending time with us for this quarter’s CAISSA Considerations. If you have questions for the Investment Committee or feedback for future topics, please use the link provided at the end of the video.