Market Summary The U.S. has proven its resiliency once again, just as it has for 250 years. Despite one of the worst oil shocks since the 1970s American consumers kept spending, and the AI investment wave continued to power the economy through. Oil prices have now returned to pre-war levels following the June 17 Memorandum of Understanding (MOU) signed by Iran and the U.S. Assuming it holds, gas prices should follow oil lower, relieving pressure on consumers and businesses.  The S&P 500 Index rebounded strongly off the late March lows fueled by powerful upward earnings revisions. We have rarely seen such increases outside the early days of a post-recession recovery. The gains have been especially noteworthy within technology, in particular semiconductors and related equipment that are in short supply in relation to robust AI-driven demand. For the quarter, the S&P 500 Index increased a remarkable 15.2%. The performance of our Clients’ portfolios was weighed down by weak performances from our healthcare, financial, and software and service holdings, many of which continue to face negative sentiment related to AI disintermediation fears. We have seen no deterioration in the earnings outlooks for these holdings and will continue to employ our long-held investment process. Based on our experience during the dot com era, we have confidence that our disciplined process will lead to improved returns in time. Economic Outlook The resilience of the U.S. economy can be attributed to the stimulus provided by last fall’s Fed rate cuts and the tax cuts included in the One Big Beautiful Bill Act. When combined with heavy AI spending, these factors have more than offset the headwind posed by higher gas prices. First quarter real GDP grew at a +2.1% quarter-over-quarter annualized rate, a rebound from the government shutdown-impacted +0.5% fourth quarter growth. The positive momentum appears to have carried forward through the second quarter despite the oil shock. While the latest Atlanta Fed GDPNow real-time estimate of second quarter growth recently dropped to +1.2%, final sales to private domestic purchasers continue to grow steadily in the +2.5 – 3.0% range, much as it has for the past three years. Final sales remove the impact of changes in inventories, trade, and government spending and thus better reflects underlying demand. The AI spending wave has been especially powerful in supporting economic growth in the U.S. – both directly via the construction, equipping and powering of data centers, and indirectly via the wealth effect caused by a rising stock market led by those companies supporting the AI build-out. The wealth effect has been a major contributing factor behind the resilience of consumer spending, particularly by upper-income households. Easing fuel and food prices, along with a growing labor market and rising wages, should begin to provide relief to lower- and middle-income households as well. We now expect the U.S. economy to grow +2.0 - 2.5% for all of 2026. As expected, the spike in energy prices caused by the war pushed the Consumer Price Index (CPI) [1] higher over the past several months. However, inflation has likely peaked so long as the fragile MOU holds. After topping out at +4.2% year-over-year in May, we expect headline inflation to begin following oil prices lower. Core CPI excluding food and energy prices should likewise begin to flatten out and eventually head lower as well. We now believe that both headline and core CPI could return to +2.4 - 2.7% y/y by year-end. All this assumes the Strait of Hormuz remains open and freedom of navigation in the Persian Gulf returns. Receding inflationary pressures would certainly help new Federal Reserve Chairman Kevin Warsh. Warsh made his debut at the June Federal Reserve Open Market Committee (FOMC) meetings. Contrary to expectations that he would push for lower rates, he instead emphasized the committee’s commitment to deliver price stability following five years of above target inflation. This emphasis, combined with an upward shift in Fed Funds rate expectations by his colleagues on the FOMC as reflected in the updated Summary of Economic Projections (“SEP Dot Plot”), leant a surprisingly hawkish tone to the meetings. Warsh also announced steps to potentially reshape how the Fed formulates and implements monetary policy. Such regime change at the Fed could become a source of short-term market volatility, but a likely source of longer-term health and stability for both the economy and financial markets. New leadership at the Federal Reserve strongly committed to price stability along with falling oil prices should allow inflation expectations to remain firmly anchored, ultimately paving a pathway for long bond yields to ease once again. That development, combined with continued strong growth in profits, should support a further rise in stock prices. Indeed, profit forecasts continue to be revised higher. S&P 500 EPS estimates have moved up strongly over the past three months from $323 to $343 for 2026, +24% year-over-year. Likewise for next year with 2027 consensus EPS moving up from $375 to $399, +16% year-over-year. The market rebound has lifted the forward P/E multiple for the S&P 500 Index back above 20x, up from 19x in March. While still above the long-term historical average of 16-17x, valuations are less demanding than they were last Fall thanks to the robust growth in earnings. Investor sentiment, not surprisingly, has become more bullish, though not excessively so. Neither valuations, nor sentiment, broadly speaking, are reasons for alarm presently, though pockets of overvaluation and excessive enthusiasm do exist, most notably within semiconductors. Ownership of a diversified selection of attractively valued, high-quality growth stocks has not proven to be a winning one in this year’s highly momentum-driven market. However, we believe we may be on the cusp of a meaningful market rotation, one that has already been evident in the early days of the new quarter. Rising stock volatility is typically a hallmark of a market undergoing a leadership transition. The big daily rotational swings we have recently witnessed suggest investors have grown increasingly uncomfortable about portfolio positioning. Investors have likely become fearful of being overly concentrated in a narrow group of highly valued and widely owned momentum stocks and have begun to diversify their holdings to reduce risk. Layer on the end of war, falling oil prices, receding tariff pressures, and accelerating growth across more sectors of the economy, and you have the makings of broadening market participation. We believe such a development should favor how our Clients’ portfolios are positioned. We continue to see the most compelling combinations of growth and value within technology and communication services, health care, and financials. We have also begun to selectively add industrial and consumer discretionary exposure to take advantage of improving cyclical and secular forces. [1] The Consumer Price Index (CPI) is an economic indicator that measures inflation in the United States.