From Geopolitics to Generative AI: Equities Rally as Markets Shift Focus

June 2026

Equity markets put in another strong performance in May with the S&P 500 up 5.1%.and the MSCI EAFE Index up 2.6%. The Nasdaq and MSCI Emerging market index were two standouts to the positive with 8.4% and 9.4% returns respectively.

US Bond market yields rose with the US Treasury 2-year bond yield up 10 basis points to 3.98%, the US Treasury 10-year bond yield up 5 basis points to 4.45% and the US Treasury 30-year bond yield was up 1 basis point to 4.99%. On May 19^th, the US Treasury 30-year bond yield hit 5.18%, the highest level since 2007.

Within the S&P 500, Technology was the leading sector, up 15.9%, followed by Consumer Discretionary, up 2.6% and Healthcare up 2.3%. All other sectors were negative with Energy -6.1%, Utilities -5.5% and Consumer Staples -3.3%.

The US Dollar index rose 0.9% to 98.91 while WTI Oil and Brent Crude oil dropped 16.9% and 19.3% on the expectations of an agreement between the US and Iran to reopen the Strait of Hormuz.

Source: Clearonomics

The dominant theme in the market has moved from the war in Iran to AI. Hyperscaler capex with semiconductor stocks, the most recent beneficiary. AI hypercsaler capex continues to grow with expectations for $688bn spent this year and an estimated $869bn spent next year. This in turn has driven earnings to higher expectations.

Source: Bloomberg

What could derail the market?

Inflation picks back up from extended elevated energy prices and the Fed is forced to raise interest rates. Since the war in Iran started the market has moved from expecting to Fed cut in the next year to potentially one hike.
Rising bond yields draw capital away from equities and creates tighter financial conditions.
Technology performance slows

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Forecasts of financial market trends that are based on current market conditions constitute Pallas Capital Advisors, LLC’s judgment, and are subject to change without notice. “Expected” return estimates are subject to uncertainty and error. The ability to achieve similar outcomes is subject to risk factors over which Pallas may have no or limited control. References to expected returns are not promises or even estimates of actual returns an investor may achieve.

Alternative asset classes, such as private equity and private credit can offer diversification and greater return potential to an investment portfolio, but they also carry different risks, including illiquidity, valuation complexities, and lower regulatory oversight compared to public investments. Investors should carefully consider their investment objectives, risk tolerance, and the illiquid nature of these assets before investing.

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