Commentary from the Investment Committee of Coral Gables Trust
Q2 2026 – The Tide Turns
If the first quarter of 2026 was marked by the escalation of geopolitical tensions, the second quarter was characterized by their gradual resolution. The conflict between the United States and Iran, which drove oil prices sharply higher and pressured markets in the first quarter, began to ease as diplomatic efforts gained traction. By mid-June, a peace framework had been reached, the Strait of Hormuz was set to reopen, and crude oil had retraced its conflict-driven gains. As we write, the Iran/U.S. ceasefire agreement has broken down with fighting resuming in the region causing some reversal of commodity prices. U.S. equity markets, which spent much of the quarter recovering record highs, were supported by declining energy costs, resilient corporate earnings, and a continued broadening of market participation beyond the mega-cap technology sector. For the quarter, the major U.S. indices staged a powerful rebound off their depressed first-quarter levels. The NASDAQ led among the major domestic averages with a gain of +21.60%, followed by the S&P 500 at +15.20% and the Dow Jones Industrial Average at +13.38%. The recovery was broad: the small-cap Russell 2000 rose +21.57%, virtually matching the technology-heavy NASDAQ and underscoring how far participation widened beyond the mega-cap leaders. Markets reached fresh record highs in late May and early June before the Federal Reserve’s hawkish June meeting prompted equities to give back a portion of those gains in the closing weeks of the quarter.
Source: Coral Gables Trust Research, 6/30/2026.
Beneath the headline indices, the most important development of the quarter was the continued broadening of market leadership. For much of the past two years, returns were dominated by a narrow group of mega-cap technology companies; in the second quarter, that concentration eased further as the “Magnificent Seven” lagged the broader market and investors rotated toward parts of the market trading at more reasonable multiples. The clearest evidence was the breadth of the rally itself: the small-cap Russell 2000 (+21.57%) matched the NASDAQ (+21.60%) nearly point for point, a striking turn for an asset class that had lagged for much of the prior two years. Smaller companies are typically more sensitive to the domestic economy and the cost of capital, and a still-expanding economy paired with valuations well below those of the mega-cap leaders has improved their relative appeal. The underlying shift toward a wider, more fundamentally driven market is a healthy one, and it plays to the disciplined, valuation-aware security selection our active managers practice.
Economic Developments: Fundamentals Remain Intact
The U.S. labor market slowed more visibly as the quarter closed. June payrolls rose by just 57,000, well below expectations of roughly 110,000 and the slowest pace in four months, while May’s gain was revised down to 129,000. The unemployment rate ticked down to 4.2%, though the decline owed partly to workers leaving the labor force, with participation slipping to 61.5%. Gains were concentrated in professional and business services, health care, and social assistance, while leisure and hospitality declined after a World Cup-aided surge in May. The broader read: an economy that is slowing but not breaking, with layoffs still contained and the consumer still spending.
The growth picture is more mixed. Final first-quarter GDP came in at 2.1%, and the Atlanta Fed’s GDPNow model, which had recovered toward 2.5% as oil prices fell, slipped to 1.2% in its July 1 update as softer trade and investment data rolled in. Much of that decline traces to volatile net-export flows rather than consumer spending, and the estimate will be revised several times before the official reading arrives later this month. Still, the direction of travel matches the labor data: an economy that is expanding, but at a below-trend pace. Falling energy costs remain a genuine tailwind, removing a real drag on household purchasing power and business margins as the second half begins.
Inflation told the quarter’s most complicated story. Headline CPI accelerated for a third straight month to 4.2% year-over-year in May, its highest reading since April 2023, driven largely by energy, which contributed more than 60% of the monthly increase as the spring oil surge passed through to gasoline, airfares, and freight. Core CPI was calmer at 2.9% year-over-year, with monthly core readings cooling to 0.2%. Core PCE, the Fed’s preferred gauge, was firmer than we would have liked at 3.4% and showed that some of the oil shock has bled into underlying prices. With the resumption of fighting in the Middle East, oil prices have increased, erasing the progress made during the April/May peace negotiations. This could further complicate the headline inflation picture over the next few months increasing the odds of a rate hike later in 2026 or early 2027.
Source: U.S. Bureau of Labor Statistics. Headline vs. core CPI, year-over-year, 2026
Federal Reserve: A New Chair, A New Regime
The second quarter brought a changing of the guard at the Federal Reserve. With Jerome Powell’s term concluded, Kevin Warsh was sworn in on May 15 and presided over his first FOMC meeting on June 16–17, where the committee voted unanimously to hold the federal funds target rate at 3.50%–3.75%, unchanged since the December 2025 cut. The meeting mattered less for the rate decision than for what it signaled. The post-meeting statement was pared back to roughly 130 words from more than 300, stripped of forward guidance and the prior easing bias, and refocused on price stability. Warsh declined to submit his own projection to the “dot plot” and announced internal task forces to review the Fed’s communications, balance sheet, and inflation framework. The message: a more concise, less telegraphed, and more data-dependent Fed.
The updated Summary of Economic Projections reinforced the hawkish turn. Where the March dot plot still projected one rate cut in 2026, the June projections removed it, lifting the median year-end rate to 3.8%, above the current range. Nine of the 18 participating FOMC members now anticipate at least one hike by year-end, and inflation forecasts for 2026 were revised sharply higher. Markets adjusted quickly: after entering the year expecting two or three cuts, futures ended the quarter assigning meaningful odds of a hike by December, and in the weeks after the meeting growth stocks gave back ground, Treasury yields rose, and the dollar strengthened. The soft June employment report may temper that repricing as the third quarter begins, a reminder that the policy path remains data-dependent in both directions.
Source: Federal Reserve, Summary of Economic Projections. Distribution of FOMC rate projections, March vs. June 2026.
Fixed Income Markets: Yields Reprice Higher
Fixed income markets spent the quarter adjusting to the Federal Reserve’s more hawkish posture. Treasury yields moved higher, particularly at the short end of the curve, where interest rates are most sensitive to changes in Fed policy. The 2-year Treasury yield ended the quarter at 4.17%, up sharply as markets repriced the policy path, while the 10-year finished at 4.47% and the 30-year at roughly 4.90%. The Bloomberg Aggregate Bond Index eked out a +0.67% return for the quarter, as coupon income narrowly outpaced the drag from rising yields, leaving the index up +0.62% for the first half. Credit, by contrast, took the Fed’s hawkish turn in stride: investment-grade spreads tightened to roughly 76 basis points and high yield to about 275 basis points by quarter-end, both near multi-year lows. The quarter’s pressure on bonds came from rates, not credit. The silver lining is that higher yields mean higher income. With corporate balance sheets healthy and yields attractive across the curve, we believe high-quality fixed income remains an important source of both income and diversification.
Source: U.S. Department of the Treasury. U.S. Treasury yield curve, year-end 2025 vs. June 30, 2026.
Beyond Borders: The Dollar’s Turn
After leading U.S. stocks decisively through 2025 and the first quarter of 2026, international developed equities ceded the quarter to a resurgent U.S. market. The MSCI EAFE Index returned +11.08%, a strong absolute gain, but one that trailed the S&P 500’s +15.20%. The reversal owed much to currency: the dollar, whose weakness had amplified international returns throughout 2025, strengthened after the Fed’s hawkish June turn, trimming dollar-based returns for U.S. investors just as the domestic rebound accelerated. Emerging markets were the quarter’s clear standout, with the MSCI Emerging Markets Index surging +24.14% and outpacing even the resurgent U.S. market.
Regardless of any single quarter’s scoreboard, the valuation case for international diversification remains intact. U.S. equities trade at roughly 22x forward earnings, above their long-run average and a substantial premium to international developed markets at 16.7x and emerging markets at 12.7x. History shows that prolonged periods of U.S. leadership eventually give way to sustained cycles of international outperformance, typically coinciding with a weaker dollar. The Investment Committee remains constructive on international exposure as a structural part of well-diversified portfolios, even as currency swings drive near-term results.
Source: Invesco Markets Review At-a-Glance; Bloomberg, as of 6/30/2026.
Thoughts on Asset Allocation
The first quarter was a reminder of why diversification matters when markets grow overly concentrated, and the second quarter reinforced it as leadership broadened beyond a handful of mega-cap technology stocks. As tensions in the Middle East eased and oil prices declined, some of the areas that led earlier in the year gave back gains, while fundamentally valued companies, cyclical sectors, and small- and mid-cap stocks took on a larger role in driving returns.
We continue to encourage investors to maintain diversified portfolios weighted toward the areas where we see the most attractive long-term opportunities: international equities, small-cap and mid-cap companies, and businesses with strong fundamentals trading at reasonable valuations. Mega-cap technology remains an important part of the market; however, investors must pay attention to the extreme concentration that exists among the broad large-cap indices.
As we head into the second half of 2026, we expect periods of heightened volatility, particularly as the midterm elections draw closer. Going back to 1950, markets were higher one year later following every mid-term election year which is proof that election events should never influence investors to make changes to their long-term portfolio goals unless absolutely necessary.
We remain confident in the active managers we have selected across our equity and fixed income portfolios. Their disciplined investment process and long-term perspective have continued to deliver strong results across a variety of market environments. Below is a selection of our equity and fixed-income managers who notably outperformed their mandates in Q2 2026.
*Returns are from actual portfolio results. Results may vary. Past performance is no guarantee of future returns.
We look forward to speaking with each of you about our investment philosophy and strategies and your portfolio’s performance.
For additional information, please contact Mason Williams, Chief Investment Officer/Managing Director, at 786-497-1214, or Michael Unger, Senior Vice President/Investment Officer, at 786-292-0310.
RESOURCES
Quarterly Report: Q2 2026
Q2 2026 – The Tide Turns
If the first quarter of 2026 was marked by the escalation of geopolitical tensions, the second quarter was characterized by their gradual resolution. The conflict between the United States and Iran, which drove oil prices sharply higher and pressured markets in the first quarter, began to ease as diplomatic efforts gained traction. By mid-June, a peace framework had been reached, the Strait of Hormuz was set to reopen, and crude oil had retraced its conflict-driven gains. As we write, the Iran/U.S. ceasefire agreement has broken down with fighting resuming in the region causing some reversal of commodity prices. U.S. equity markets, which spent much of the quarter recovering record highs, were supported by declining energy costs, resilient corporate earnings, and a continued broadening of market participation beyond the mega-cap technology sector. For the quarter, the major U.S. indices staged a powerful rebound off their depressed first-quarter levels. The NASDAQ led among the major domestic averages with a gain of +21.60%, followed by the S&P 500 at +15.20% and the Dow Jones Industrial Average at +13.38%. The recovery was broad: the small-cap Russell 2000 rose +21.57%, virtually matching the technology-heavy NASDAQ and underscoring how far participation widened beyond the mega-cap leaders. Markets reached fresh record highs in late May and early June before the Federal Reserve’s hawkish June meeting prompted equities to give back a portion of those gains in the closing weeks of the quarter.
Source: Coral Gables Trust Research, 6/30/2026.
Beneath the headline indices, the most important development of the quarter was the continued broadening of market leadership. For much of the past two years, returns were dominated by a narrow group of mega-cap technology companies; in the second quarter, that concentration eased further as the “Magnificent Seven” lagged the broader market and investors rotated toward parts of the market trading at more reasonable multiples. The clearest evidence was the breadth of the rally itself: the small-cap Russell 2000 (+21.57%) matched the NASDAQ (+21.60%) nearly point for point, a striking turn for an asset class that had lagged for much of the prior two years. Smaller companies are typically more sensitive to the domestic economy and the cost of capital, and a still-expanding economy paired with valuations well below those of the mega-cap leaders has improved their relative appeal. The underlying shift toward a wider, more fundamentally driven market is a healthy one, and it plays to the disciplined, valuation-aware security selection our active managers practice.
Economic Developments: Fundamentals Remain Intact
The U.S. labor market slowed more visibly as the quarter closed. June payrolls rose by just 57,000, well below expectations of roughly 110,000 and the slowest pace in four months, while May’s gain was revised down to 129,000. The unemployment rate ticked down to 4.2%, though the decline owed partly to workers leaving the labor force, with participation slipping to 61.5%. Gains were concentrated in professional and business services, health care, and social assistance, while leisure and hospitality declined after a World Cup-aided surge in May. The broader read: an economy that is slowing but not breaking, with layoffs still contained and the consumer still spending.
The growth picture is more mixed. Final first-quarter GDP came in at 2.1%, and the Atlanta Fed’s GDPNow model, which had recovered toward 2.5% as oil prices fell, slipped to 1.2% in its July 1 update as softer trade and investment data rolled in. Much of that decline traces to volatile net-export flows rather than consumer spending, and the estimate will be revised several times before the official reading arrives later this month. Still, the direction of travel matches the labor data: an economy that is expanding, but at a below-trend pace. Falling energy costs remain a genuine tailwind, removing a real drag on household purchasing power and business margins as the second half begins.
Inflation told the quarter’s most complicated story. Headline CPI accelerated for a third straight month to 4.2% year-over-year in May, its highest reading since April 2023, driven largely by energy, which contributed more than 60% of the monthly increase as the spring oil surge passed through to gasoline, airfares, and freight. Core CPI was calmer at 2.9% year-over-year, with monthly core readings cooling to 0.2%. Core PCE, the Fed’s preferred gauge, was firmer than we would have liked at 3.4% and showed that some of the oil shock has bled into underlying prices. With the resumption of fighting in the Middle East, oil prices have increased, erasing the progress made during the April/May peace negotiations. This could further complicate the headline inflation picture over the next few months increasing the odds of a rate hike later in 2026 or early 2027.
Source: U.S. Bureau of Labor Statistics. Headline vs. core CPI, year-over-year, 2026
Federal Reserve: A New Chair, A New Regime
The second quarter brought a changing of the guard at the Federal Reserve. With Jerome Powell’s term concluded, Kevin Warsh was sworn in on May 15 and presided over his first FOMC meeting on June 16–17, where the committee voted unanimously to hold the federal funds target rate at 3.50%–3.75%, unchanged since the December 2025 cut. The meeting mattered less for the rate decision than for what it signaled. The post-meeting statement was pared back to roughly 130 words from more than 300, stripped of forward guidance and the prior easing bias, and refocused on price stability. Warsh declined to submit his own projection to the “dot plot” and announced internal task forces to review the Fed’s communications, balance sheet, and inflation framework. The message: a more concise, less telegraphed, and more data-dependent Fed.
The updated Summary of Economic Projections reinforced the hawkish turn. Where the March dot plot still projected one rate cut in 2026, the June projections removed it, lifting the median year-end rate to 3.8%, above the current range. Nine of the 18 participating FOMC members now anticipate at least one hike by year-end, and inflation forecasts for 2026 were revised sharply higher. Markets adjusted quickly: after entering the year expecting two or three cuts, futures ended the quarter assigning meaningful odds of a hike by December, and in the weeks after the meeting growth stocks gave back ground, Treasury yields rose, and the dollar strengthened. The soft June employment report may temper that repricing as the third quarter begins, a reminder that the policy path remains data-dependent in both directions.
Source: Federal Reserve, Summary of Economic Projections. Distribution of FOMC rate projections, March vs. June 2026.
Fixed Income Markets: Yields Reprice Higher
Fixed income markets spent the quarter adjusting to the Federal Reserve’s more hawkish posture. Treasury yields moved higher, particularly at the short end of the curve, where interest rates are most sensitive to changes in Fed policy. The 2-year Treasury yield ended the quarter at 4.17%, up sharply as markets repriced the policy path, while the 10-year finished at 4.47% and the 30-year at roughly 4.90%. The Bloomberg Aggregate Bond Index eked out a +0.67% return for the quarter, as coupon income narrowly outpaced the drag from rising yields, leaving the index up +0.62% for the first half. Credit, by contrast, took the Fed’s hawkish turn in stride: investment-grade spreads tightened to roughly 76 basis points and high yield to about 275 basis points by quarter-end, both near multi-year lows. The quarter’s pressure on bonds came from rates, not credit. The silver lining is that higher yields mean higher income. With corporate balance sheets healthy and yields attractive across the curve, we believe high-quality fixed income remains an important source of both income and diversification.
Source: U.S. Department of the Treasury. U.S. Treasury yield curve, year-end 2025 vs. June 30, 2026.
Beyond Borders: The Dollar’s Turn
After leading U.S. stocks decisively through 2025 and the first quarter of 2026, international developed equities ceded the quarter to a resurgent U.S. market. The MSCI EAFE Index returned +11.08%, a strong absolute gain, but one that trailed the S&P 500’s +15.20%. The reversal owed much to currency: the dollar, whose weakness had amplified international returns throughout 2025, strengthened after the Fed’s hawkish June turn, trimming dollar-based returns for U.S. investors just as the domestic rebound accelerated. Emerging markets were the quarter’s clear standout, with the MSCI Emerging Markets Index surging +24.14% and outpacing even the resurgent U.S. market.
Regardless of any single quarter’s scoreboard, the valuation case for international diversification remains intact. U.S. equities trade at roughly 22x forward earnings, above their long-run average and a substantial premium to international developed markets at 16.7x and emerging markets at 12.7x. History shows that prolonged periods of U.S. leadership eventually give way to sustained cycles of international outperformance, typically coinciding with a weaker dollar. The Investment Committee remains constructive on international exposure as a structural part of well-diversified portfolios, even as currency swings drive near-term results.
Source: Invesco Markets Review At-a-Glance; Bloomberg, as of 6/30/2026.
Thoughts on Asset Allocation
The first quarter was a reminder of why diversification matters when markets grow overly concentrated, and the second quarter reinforced it as leadership broadened beyond a handful of mega-cap technology stocks. As tensions in the Middle East eased and oil prices declined, some of the areas that led earlier in the year gave back gains, while fundamentally valued companies, cyclical sectors, and small- and mid-cap stocks took on a larger role in driving returns.
We continue to encourage investors to maintain diversified portfolios weighted toward the areas where we see the most attractive long-term opportunities: international equities, small-cap and mid-cap companies, and businesses with strong fundamentals trading at reasonable valuations. Mega-cap technology remains an important part of the market; however, investors must pay attention to the extreme concentration that exists among the broad large-cap indices.
As we head into the second half of 2026, we expect periods of heightened volatility, particularly as the midterm elections draw closer. Going back to 1950, markets were higher one year later following every mid-term election year which is proof that election events should never influence investors to make changes to their long-term portfolio goals unless absolutely necessary.
We remain confident in the active managers we have selected across our equity and fixed income portfolios. Their disciplined investment process and long-term perspective have continued to deliver strong results across a variety of market environments. Below is a selection of our equity and fixed-income managers who notably outperformed their mandates in Q2 2026.
*Returns are from actual portfolio results. Results may vary. Past performance is no guarantee of future returns.
We look forward to speaking with each of you about our investment philosophy and strategies and your portfolio’s performance.
For additional information, please contact Mason Williams, Chief Investment Officer/Managing Director, at 786-497-1214, or Michael Unger, Senior Vice President/Investment Officer, at 786-292-0310.
Index of Commentary
Q2 2026
Q1 2026
Q4 2025
Q3 2025
Q2 2025
Q1 2025
Q4 2024
Q3 2024
Q2 2024
Q1 2024
For additional information, please contact:
Mason Williams
Managing Director
Chief Investment Officer
Michael J. Unger, CFP®
Senior Vice President
Investment Officer