Markets rebound but the Fed eyes a rate hike

After months of conflict, the United States and Iran moved to formalise a ceasefire through a Memorandum of Understanding in June. The agreement set out an immediate and permanent end to military operations on all fronts, including Lebanon, with both sides committing to avoid any future use of force. The US also agreed to waive sanctions for 60 days and has started to scale back the naval blockade that had been limiting Iranian trade.

There had been some early signs of easing tensions feeding through to real activity. Traffic through the Strait of Hormuz had begun to recover following Iran's attacks on vessels in the region, with a growing number of shipping operators becoming willing to send crude oil tankers back into the Persian Gulf. At the time, the ceasefire appeared to provide a framework for de-escalation, even though it fell well short of a comprehensive agreement.

Optimism fades

More recently, however, that optimism has faded. Following renewed attacks between the US and Iran, President Trump stated that the tentative ceasefire was effectively over, raising doubts over the prospects for further peace negotiations and increasing the risk of renewed escalation.

Oil prices responded by moving higher as investors reassessed geopolitical risks and the potential for disruptions to energy supplies flowing through the region. However, the increase has been far more modest than during previous episodes of tension and remains well below the highs reached at the peak of the conflict earlier this year.

While the path towards a broader agreement has become less certain, market pricing continues to imply that investors expect both sides to avoid a sustained escalation that would materially threaten global energy markets.

Semiconductors power ahead

The US Semiconductor Index has soared in Q2, putting it on track for its strongest quarter on record and its best year since the dot-com boom in 1999. The main driver remains the massive investment in AI infrastructure, with semiconductors continuing to be the biggest beneficiaries.

Leadership within the sector has started to rotate. Micron and Intel have led the latest move higher, stepping in as Nvidia and Broadcom take a bit of a breather. Micron, the largest US memory manufacturer, has been a standout, reporting close to 350% year-on-year revenue growth in its latest earnings release. Demand for memory remains very strong, while supply is expected to stay tight through the rest of the year.

That said, the ride has not been smooth. Volatility in chip stocks has increased sharply, with expected volatility seeing its largest annual increase on record. The sector has recently swung from gains of around 8% in a single day to falls of more than 10%. At the same time, valuations have moved higher, highlighting that expectations are demanding and the path from here could be uneven.

The Fed turns more hawkish

Not every signal in June pointed toward easier conditions. At Kevin Warsh’s first meeting as chair of the Federal Reserve, the US central bank held rates steady. However, projections turned more hawkish, with roughly half of the Fed committee now anticipating a hike before year-end, a reversal from earlier expectations of cuts.

Inflation stayed higher than expected, partly due to energy supply shocks. Markets reacted by pushing short-term rates up, adjusting to the idea that rates may stay higher for longer.

Questions for the second half

Three questions matter most for the second half of 2026: whether AI-related earnings can justify elevated valuations, where the US-Iran conflict goes from here, and how the Fed’s hawkish tilt will play out against incoming data.

 
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