Last quarter, investors seemed to throw off the concerns that had weighed on markets in Q1 about the impact of the Iran-US war on the global economy. Unexpectedly good US inflation data for June was coupled with a slight dip in unemployment. Company earnings stayed mostly strong, with results beating expectations by as much as 40% for companies reported so far. And, in financial markets, optimism about AI-related trades returned to the fore, powered in part by the record-breaking IPO of SpaceX and the prospect of others to come.

The S&P 500 had its best quarter since the post-pandemic recovery of 2020. The US was not alone. Equities surged in major markets around the world. By the end of June, global equities were up by more than 11% for the first half of 2026. In the US, the three major indices climbed by between 9 and 12%.

In July, developments in the on-again, off-again Iran war have worsened, changing the picture once more. Markets have reacted – but in a more muted way than at the outbreak of the war. Oil prices hit $100 a barrel on July 23 but then retreated. In equities, some sheen has come off the AI-related hyperscalers that have driven markets for more than two years. But mostly markets have held their nerve – so far.

On July 7, President Trump declared that the war was back on. On July 20, after mounting hostilities and four reported new US casualties as well as some 100 wounded, diplomatic efforts to agree on another ceasefire were reported. A few days later, the war had escalated further. As the week ended, rumors of diplomacy again circulated, calming markets. But the Strait of Hormuz is effectively closed again. A second “choke point” has emerged at the south of the Red Sea as Yemeni rebel Houthis declared a blockade on ships to and from Saudi oil fields from passing through the narrow Bab el-Mandeb passage that they can control. With oil prices first creeping, and then jumping higher, gas prices at the pump have topped $4 a gallon again and look set to climb further unless tensions subside. Inflation fears were being voiced by some central bankers, including at the US Federal Reserve, even before this.

So what next?

After a roller coaster first half of 2026, with high geopolitical uncertainty continuing into the third quarter, RockCreek sees three main themes looking ahead:

The AI powered boom: winners and losers. The promise of AI has powered the US and global economy since ChatGPT was officially unveiled in late 2022. The investment and spending boom it triggered has made possible an extraordinary run up in equity prices, despite geopolitical and economic shocks from trade conflicts to war in the Middle East, as well as in Europe. Now investors are wondering not only how long the boom can continue but who will be the main beneficiaries.

Monetary policy: the cycle turning? New Fed Chair Kevin Warsh has already begun to make his mark, shortening the post meeting FOMC statement, opening five reviews of key Fed policies and operations, and declining to put forward his own projection for interest rates in the “dot plot.” Before he took up his post, Warsh was widely expected to line up with President Trump’s desire for lower interest rates. But during the second quarter, market views shifted to price in a rate rise rather than a cut this year. Markets expect one hike, with a 75% chance we get a second 25 basis point hike by December of this year. Inflation has now stayed above the Fed’s 2% price stability goal for more than five years. With energy prices again on the rise, the better data in June is likely to prove a blip. Look for further changes in market rates as inflation data come in and Chair Warsh’s words are followed carefully. Already, the ECB has raised rates.

Politics and geopolitics in the run up to November. AI optimism since 2023 has outweighed any negative impact from political uncertainty, amid a US pull back from traditional positions of free trade, open markets and strong alliances. Nevertheless, higher energy prices and the reimposition of tariffs through existing authorities, rather than executive order, impact inflation – and thus monetary policy – and remain a threat to market confidence. President Trump is in negative territory in opinion polls. A shift in Congressional control in November’s mid-term elections is expected at least in the House. This could exacerbate political tensions.

Read the full RockCreek Q2 2026 Commentary Letter