Tensions Flared, but Resilience Prevailed
The second quarter of 2026 tested investors’ resolve before rewarding their patience. What began under the shadow of escalating conflict in the Middle East (and the energy shock that accompanied it) ended with major equity indices at or near record highs. A sharp drawdown in April, driven by the closure of the Strait of Hormuz and a surge in oil prices gave way to a remarkable recovery. This led to markets recouping their losses in a matter of weeks and pressing higher through May and June. Once again, the quarter reminded us that disciplined investors are often rewarded for looking past the headlines.
Canadian equities posted solid gains, buoyed by exceptional strength in the energy sector as elevated oil prices lifted domestic producers. The S&P/TSX Composite Index rose 6.34%, recovering from a near nine percent drawdown to briefly reach fresh all-time highs in early June, while the TSX Small Cap Index advanced 505%. The Bank of Canada held its overnight rate steady at 2.25% at both its April 29th and June 10th meetings—its fifth consecutive hold—as policymakers balanced softening growth against energy-driven inflation. With headline inflation climbing toward 2.8% in April, Governing Council chose to look through the war’s immediate impact on gasoline prices, while signalling that significant new U.S. trade restrictions could prompt further easing down the road.
South of the border, U.S. equities staged an even more powerful rebound. The S&P 500 surged 14.82%, while the S&P 600 Small Cap Index outpaced its large-cap counterpart with an 18.51% gain. This is the kind of small-cap leadership that typically signals returning risk appetite. Artificial intelligence remained the engine of the advance, with AI-linked names now accounting for a record share of the index’s market capitalization; strip them out, and much of the rally fades. The Federal Reserve held its benchmark rate at 3.50% to 3.75% on June 17th, the first meeting chaired by Kevin Warsh. Notably, the Committee’s updated projections turned more hawkish, shifting from an implied rate cut to the prospect of a possible hike, with roughly half of officials now anticipating at least one increase this year amid still-elevated, energy-driven inflation.
The defining tension of the quarter was the tug-of-war between geopolitical risk and underlying economic resilience. An interim agreement between the United States and Iran, announced late in the quarter, eased oil prices from their April peaks relieving inflation fears and reigniting risk appetite. Yet concentration remains a genuine concern: with so much of the market’s strength tied to a narrow group of AI leaders, breadth is thin. Tellingly, CEO confidence slipped back into negative territory even as equity prices climbed, a reminder that market performance and economic sentiment do not always move in step.
Looking ahead, several variables will shape the second half of the year. The renegotiation of USMCA, set to begin in July, introduces fresh trade uncertainty for Canada and its exporters. The durability of the Middle East ceasefire and the trajectory of oil prices will continue to influence both inflation and central bank decisions. The central question for equities, whether AI-driven enthusiasm can broaden into a more diversified, durable advance, or whether the market remains dependent on a handful of leaders, will loom large. With the Federal Reserve signalling a higher-for-longer stance and the Bank of Canada poised to respond to trade developments, monetary policy remains a key swing factor. Through a quarter defined by conflict, volatility, and rapid reversals, the lesson remains a familiar one: markets reward patience and punish panic. The April drawdown and the swift rally that followed underscored just how quickly conditions can change and how costly it can be to abandon a sound strategy at the wrong moment. Our focus remains on disciplined portfolio construction, thoughtful diversification, and positioning designed to weather both geopolitical shocks and shifting policy. While the headlines will continue to test investor nerves, our commitment to your long-term objectives remains steady, and we are well-positioned to help you navigate the opportunities and risks that lie ahead.
Written By: Alexander McCallum
