Q2 Commentary: Through the Fog
Do you speak Latin? We sort of do!
Per caliginem (Latin: through the fog). That phrase aptly captures the second quarter, as markets rallied despite geopolitical noise, low visibility in monetary policy, and sky-high price levels, underscoring the American economy’s resilience. The second quarter recovered from a turbulent first quarter, with the S&P returning ~15% (9.3% YTD). Moreover, 84% of S&P 500 companies’ Q1 earnings beat EPS estimates, the highest rate-beat earnings since Q2 2021 (Yahoo Finance). In fact, despite the continued closure of the Strait of Hormuz, the international Brent crude oil is trading for nearly $78 per barrel. Oil prices have sharply declined since the outset of the Iran conflict, dropping from a high of $126. With the succession of FED chair Jerome Powell, heightened tensions in the Middle East, and the continued significance of AI, there were a multitude of elements influencing the economy in Q2.
The Price of AI is Energy
Though the market rebounded from Q1, the American trade deficit has widened in recent months with AI capital goods expenditures. Exports dropped 3.2%, and imports increased by 3.3%, leading to a deficit of $77.6 billion. Imports of goods increased $12.3 billion, with computer accessories and semiconductors comprising 18 % of import increases (Bureau of Economic Analysis).
The AI ecosystem is catalyzing growth, and it is rapidly changing the workforce. A Boston Consulting Group study showed that 51% of office workers regularly applied AI in their everyday work in 2025. So far in 2026, that number is approximately 74% of workers. Companies are integrating AI at unprecedented levels, inundating the computing power of Big Tech giants. Companies like OpenAI are forced to modify their pricing structures to allocate scarce computing power efficiently. Energy is a key macroeconomic variable for the American buyers and sellers, not only for AI use, but at the pump as well.
Oil prices are subsiding, falling 16% month-over-month, as the UAE boosted crude output by 80% in June. The UAE left the Organization of the Petroleum Exporting Countries (OPEC) to dodge output quotas, stimulating the oil market; the UAE produced 3.81 million barrels a day in
June, over double their production in May according to the Wall Street Journal. This move by the Emirati government is an integral part of the recent oil-price stabilization.
The Inflation Hawk Has Landed
With the introduction of Kevin Warsh, the new United States FED Chair, there is a new landscape to America’s monetary policy. Warsh is known to incorporate a hawkish approach to monetary policy. The Federal Open Market Committee (FOMC) convened in June and held interest rates at 3.50-3.75%. The probability that the FED lowers interest rates in 2026 is effectively zero, with a 79% chance that rates are hiked at some point this year (CME FedWatch).
Moreover, interest rate expectations corrected equity markets. Higher interest rates translate to a lower discounted present value of expected future earnings, as the cost of capital increases for businesses. Conceptually, raising interest rates lowers the propensity to spend, and cools price levels as a byproduct. Lenders benefit from the higher rates, and borrowers lose out. Because high costs of capital discourage borrowing, individuals and firms spend less, driving down inflation pressure.
Supply Shocks Heard Around the World
Though oil prices have declined since the end of Q1, inflation has dominated headlines and US economic conversations. The June CPI report showed a lower-than-expected inflation rate of 3.5%; in May, the CPI was 4.2%. The closure of the Strait of Hormuz has sent supply shocks throughout the world, and the index for energy commodities increased 27.1% Y/Y; the index for gasoline increased 42.9% (Bureau of Labor). Excluding food and energy – the two most volatile goods in the economy – the June Core CPI was 3% Y/Y.
If Only We Had a Crystal ball
As the markets rallied in Q2, there are plenty of looming questions for Q3: will the Administration reach an official agreement with Iran? Will the next FOMC decision align with analyst expectations despite Warsh’s unwillingness to provide commentary? The headlines never stop, so it is important that investors engineer their portfolios in a way most suitable for them; not diverging from asset allocation, having proper sector, investment style, and regional diversification. For our part, we’ll keep our eyes on the distant horizon, resisting the urge to fixate on short-term market noise and their temporary extremes.
Akili Kelekele is as an Investment Analyst at Allen Trust Company. Akili is a Quantitative Economics graduate from Tufts University. Before joining Allen Trust Company, Akili worked as an Equity Research Associate for D.A. Davidson in New York City. To speak with Akili Kelekele, please contact our office at (503) 292-1041 or via email at info@allentrust.com.
Disclosure: The information provided in this writing is for general informational purposes only and does not constitute financial advice from Allen Trust Company and Allen Capital Management. Readers are encouraged to consult with a qualified financial advisor to assess their individual circumstances and make informed decisions based on their specific situation.