A quarter-end report is a photograph. Markets do not stop moving while it is developed. We are writing about the second quarter in the third week of August, and in this instance the distance is useful rather than inconvenient: the story of this quarter is one nobody could have told on July 1, because what happened in July and the first weeks of August is what reveals the argument the second quarter had actually started.
The headline returns were extraordinary. That is the least interesting thing about them. Underneath the indexes, leadership moved in ways no one sequenced in advance — and while stocks were delivering their best quarter in six years, the bond market was already arguing with them about the price of money. That argument is where this commentary begins.
Global Market Returns · June vs. Quarter and Longer-Term Context
| Asset Class | June | Q2 2026 | YTD | 1 Yr | 3 Yr | 5 Yr | 10 Yr |
|---|
| US Stock Market | -0.31% | 15.43% | 10.86% | 22.81% | 20.35% | 12.30% | 15.06% |
| International Developed | -0.17% | 10.22% | 9.19% | 20.99% | 16.90% | 9.32% | 9.84% |
| Emerging Markets | -1.41% | 24.05% | 23.85% | 43.51% | 23.03% | 7.20% | 10.07% |
| Global Real Estate | 1.92% | 10.76% | 11.62% | 15.40% | 10.07% | 2.94% | 3.78% |
| US Bond Market | 0.24% | 0.67% | 0.62% | 3.79% | 4.16% | 0.08% | 1.54% |
| Global Bond ex-US | — | 1.77% | 1.57% | 2.60% | — | — | — |
| Commodities | -8.54% | -8.08% | 14.36% | 25.46% | 11.69% | 9.37% | 5.83% |
Returns are index returns and do not reflect client-specific performance. Global Bond ex-US figures are sourced from the Dimensional asset-class summary; longer-period figures are not shown. Past performance is not a guarantee of future results.
The Index Did Not Tell the Story
The second quarter was, by the headline numbers, extraordinary. The broad US market gained 15.4%, its best quarter in six years. But stopping at the headline index misses nearly everything interesting.
Small US companies gained 21.5%. Emerging markets returned 24.1%. Developed markets outside the United States advanced 10.2%. Global real estate rose 10.8%. Information technology led all US sectors at nearly 32%, while energy — with oil falling after the ceasefire — was the weakest, down more than 13%.
This was not another quarter in which the same handful of American giants carried everything. Leadership moved, and it moved in ways nobody sequenced in advance. June offered the clue in miniature: the broad US market slipped 0.31% over the month while small companies gained 3.74%.
US Equity Dispersion · Returns in USD as of June 30, 2026
| Asset Class | June | Q2 2026 | YTD | 1 Yr | 3 Yr | 5 Yr |
|---|
| Small Cap | 3.74% | 21.49% | 22.57% | 40.78% | 18.60% | 6.98% |
| Small/Mid Cap | 3.68% | 20.26% | 22.71% | 36.72% | 18.40% | 8.30% |
| Small Value | 3.97% | 17.19% | 22.99% | 43.01% | 18.73% | 8.23% |
| Large Growth | -2.68% | 16.74% | 5.33% | 17.71% | 22.58% | 13.71% |
| Marketwide | -0.31% | 15.43% | 10.86% | 22.81% | 20.35% | 12.30% |
| Marketwide Value | 2.32% | 13.99% | 16.53% | 27.75% | 17.80% | 10.97% |
| Large Value | 2.24% | 13.84% | 16.23% | 27.09% | 17.78% | 11.17% |
| Mid Value | 3.03% | 13.40% | 17.58% | 26.62% | 16.51% | 9.48% |
Returns are index returns and do not reflect client-specific performance. Past performance is not a guarantee of future results.
Growth stocks beat value across the board in the second quarter. Year to date, value still leads by a wide margin — large value is ahead 16.2% against 5.3% for large growth. An investor who looked only at the quarter and an investor who looked only at the half would reach opposite conclusions about the same strategy in the same year.
The clearest illustration of that principle sits in the corner of the portfolio least likely to be discussed.
Commodities and Precious Metals · Returns in USD as of June 30, 2026
| Index | June | Q2 2026 | YTD | 1 Yr | 3 Yr | 5 Yr |
|---|
| Broad Commodities | -8.54% | -8.08% | 14.36% | 25.46% | 11.69% | 9.37% |
| Gold | -11.79% | -13.54% | -7.37% | 21.00% | 26.83% | 17.04% |
Returns are index returns and do not reflect client-specific performance. Past performance is not a guarantee of future results.
Broad commodities fell 8.1% in the second quarter, and gold fell 13.5%. Read alone, that looks like a drag. Read across the half year, it is the opposite: the commodity index is up 14.4% year to date while gold is down 7.4%.
The sleeve delivered a strong first half, and it did so despite the single asset most investors reach for when the story is war, oil, and inflation. The return came from breadth across the complex — not from the metal the narrative said should have protected you. That is diversification doing precisely the job it is supposed to do, in the least intuitive way possible.
Fixed Income · Returns in USD as of June 30, 2026
| Fixed Income Segment | June | Q2 2026 | YTD | 1 Yr | 3 Yr | 5 Yr |
|---|
| Municipal Bonds | 0.96% | 2.50% | 2.32% | 7.03% | 3.76% | 1.05% |
| High Yield Corporate Bonds | 0.27% | 2.47% | 1.96% | 5.91% | 8.86% | 4.17% |
| US TIPS | -0.47% | 0.89% | 1.15% | 3.42% | 3.98% | 1.01% |
| US Aggregate Bond Index | 0.24% | 0.67% | 0.62% | 3.79% | 4.16% | 0.08% |
Returns are index returns and do not reflect client-specific performance. Past performance is not a guarantee of future results.
The bond market, meanwhile, was already arguing with the equity market. The broad US bond index returned 0.67% for the quarter — positive, but barely. Municipal bonds were the standout at 2.5%, comfortably ahead of Treasuries.
Underneath, the price of long-term money was climbing. The ten-year Treasury yield rose from 4.32% at the end of March to 4.47% at June 30, the two-year climbed 39 basis points to 4.2%, and the thirty-year ended near 4.95%. Stocks delivered their best quarter in six years while the cost of financing them rose. Those two facts are in tension, and the months since June 30 are the market beginning to work out which one gives.
What July and August Changed
July did not reverse the second quarter so much as change what the market was arguing about.
July 2026 · The Reversal
| Index | July | YTD thru 7/31 |
|---|
| Intl. Developed Markets Equity | 2.06% | 11.44% |
| Global Real Estate Equity | 2.57% | 14.49% |
| US Large-Cap Equity | -0.06% | 10.14% |
| US Small-Cap Equity | -3.03% | 18.85% |
| Emerging Markets Equity | -3.07% | 20.04% |
| US Aggregate Bond | -1.30% | -0.69% |
| US Investment Grade Corporate | -1.67% | -0.83% |
| Municipal Bonds | -1.85% | 0.43% |
Returns are index returns as of July 31, 2026 and do not reflect client-specific performance. Past performance is not a guarantee of future results.
US large-cap stocks were essentially flat. Small caps and emerging markets fell roughly 3% after their extraordinary run. Developed international stocks were the only major equity market to advance. Value gained while growth declined. Energy — the second quarter’s weakest sector — became July’s strongest, up nearly 13%, as oil prices rebounded. Information technology led the decliners on an AI-related selloff.
The sharper break was in fixed income. The broad US bond index lost 1.30% in July, ending a three-month winning streak. Municipal bonds — the second quarter’s best major sector — fell 1.85% and underperformed Treasuries. The thirty-year Treasury yield reached its highest level since 2007, and it has climbed further into August.
The Federal Reserve held its target range at 3.50%–3.75% in July, but the vote was 9–3, with three regional bank presidents dissenting in favor of a rate increase — the first three-way dissent since 2016. Futures markets now price an increase at the September meeting as more likely than not, with additional tightening priced beyond it. At the start of this year, investors expected cuts.
That inversion deserves attention, because it breaks a reflex most investors acquired over the past fifteen years. A Fed that declines to tighten is not automatically easy money. If the bond market concludes that policy is insufficiently attentive to inflation, the long end tightens conditions on its own — and mortgage rates, corporate borrowing costs, and equity discount rates rise regardless of what the policy rate does.
Which raises the question the rest of this letter is about. The long end is not an abstraction. It is a market, and it prices the way any market does — by weighing how much is being sold against who is willing to buy it. If that price is rising, something has changed on one side of that ledger or the other. In this case, both.
Who Is Going to Finance All of This?
Start with the supply. The Treasury market remains the deepest government bond market in the world, and it is being asked to absorb roughly $2 trillion of new federal borrowing a year. That is the volume side of the ledger, and it is not in question.
The other side has changed more quietly. In 2007, central banks and commercial banks — holders who often bought Treasuries for reasons other than yield — accounted for roughly three-quarters of Treasury ownership. That share is now closer to half, with hedge funds and other price-sensitive investors more important at the margin, frequently financing positions with short-term borrowing.
This does not mean America cannot finance itself. It means something subtler: the marginal buyer increasingly asks what yield he will be paid. The government will sell the next bond. Whether it clears at 4.5% or 5.3% is the open question, and once the Treasury market names a price, the consequences travel. Every investment promising a return years from now must compete with a government security paying a meaningful yield today.
Now add a second borrower to the same window. For several years the dominant investment question was how far artificial intelligence could lift profits and prices. The more consequential question is who pays for it. The largest technology companies are committing enormous sums to chips, data centers, power, and networks at the same moment Washington finances large deficits, governments rebuild defense and industrial capacity, utilities build generation, and households still need mortgages. These borrowers do not draw on separate pools of money. They meet the same institutional capital. That is why the recent surge in technology-company bond issuance matters: AI is no longer competing only for engineers, chips, and electricity. It has begun competing with governments for capital.
So far this is a story about who wants to borrow. The other half is who has been lending, and on the most generous terms available anywhere in the world that has been Japan. Years of very low Japanese rates made the yen a natural funding currency: borrow cheaply in yen, convert to dollars, buy something that yields more. That arrangement is invisible while it works. It becomes visible when the yen strengthens sharply — the borrowing becomes more expensive to repay, leverage comes down, and assets bought with borrowed yen can be sold. An American technology stock can fall not because its earnings changed but because the financing behind its ownership stopped working. Japan is also among the largest foreign owners of Treasuries, which means Japanese decisions land on both sides of the ledger at once: on the funding that supports risk assets, and on the demand for the government paper that prices everything else. That is how a currency problem in Tokyo becomes a bond-market problem in Washington, and how a bond-market problem in Washington becomes part of global equity-market plumbing.
The practical implication is worth stating plainly. It means the price of the assets you own is set partly by conditions that have nothing to do with the companies you own. A well-run business in Ohio can be repriced because a currency moved in Tokyo, because a leveraged fund had to reduce its positions, because the Treasury needed to sell more paper than usual that week. None of this makes those businesses worth less. It makes their prices move for reasons that will never appear in their earnings reports. That is not a flaw to be corrected. It is the ordinary condition of owning liquid assets in a connected financial system, and it is the strongest practical argument for owning many of them rather than a few — and for not selling on the days when the machinery is loud.
Valuation Is a Question About Earnings, Not Multiples
All of which finally reaches the portfolio. A higher price of capital is not an abstraction about bond markets; it is the number underneath every valuation. It sets what a dollar of future earnings is worth today. It also does something less visible. The companies at the center of this build-out are increasingly borrowing to fund it rather than paying out of cash flow, and interest is a claim on earnings that gets paid before shareholders do. So the rising price of capital shows up twice: once in what future earnings are worth, and once in how much of those earnings ever reaches you.
That second effect is the one the market is arguing about right now, and the argument is unusually well matched. One side points out that the S&P 500 rose substantially over the past year while its forward price-to-earnings multiple fell, because expected earnings rose faster than prices did. By that measure the market got cheaper, not dearer. The other side points at the same earnings and asks whether they are normal. Long-horizon measures such as the cyclically adjusted P/E sit near 41 times, and profit margins are at levels that history says do not persist indefinitely.
Both can be true at once, which is why we would not choose between them. A market can become cheaper against forecast earnings and still prove expensive if those forecasts embed margins that do not survive contact with higher financing costs, competition, and the ordinary reversion of unusually good years. The question is not the P. It is the durability of the E.
The accounting makes that harder to see than it should be. When a chip vendor sells equipment, it recognizes the revenue quickly. The buyer capitalizes the purchase and depreciates it over years. The supplier’s economics therefore appear well before the buyer’s full costs do. We can know the merchant selling shovels is prospering long before we know whether the miners found gold.
And that question — whether today’s earnings are the beginning of something durable or the best part of a cycle — is not one anybody can answer from here. That is not a failure of analysis. It is the actual condition, and the right response to it is not a better forecast but a portfolio that does not require one.
Resilience Is Not the Absence of Risk
Investors have now survived a financial crisis, a pandemic, a European war, a tariff regime, and a Middle East conflict. Gillian Tett has made the useful observation that repeated survival can curdle into complacency: each new risk is met with the reflection that the last several did not break anything.
But resilience is evidence of resilience. It is not evidence that risk has disappeared.
That is the case for diversification stated properly. Diversification is not pessimism, and it is not a forecast. It is the acknowledgment that apparently contradictory conditions coexist — exceptional corporate profits alongside a weakening labor market, where payrolls went from a gain of 172,000 in May to a loss of 23,000 in July with 103,000 of downward revisions; records in equities alongside a selloff in long bonds; genuine disinflation alongside renewed oil risk. None of these has to resolve neatly. They can simply persist together.
Some argue the world is moving toward a new economic operating system, in which national security, tariffs, industrial policy, and financial statecraft matter more than efficiency. They may be right. But there is an important distinction: there may be a new operating system for the global economy; there is not a new one for investing.
Diversification still matters, because leadership changes before anyone announces that it has. Valuation still matters, because revolutionary technologies can be poor investments if too much capital arrives at too high a price. The role of high-quality bonds has changed, because the return available from them is materially different than it was five years ago. Taxes and costs matter because they remain among the few variables you actually control. And patience matters, because markets move faster than the stories later used to explain them.
There is a version of this that matters more than any of the market commentary. A higher price of capital is not only a risk to asset prices; it is also what changes the value of a future obligation. If a portfolio exists to meet real liabilities — a retirement income stream, tuition, a charitable commitment, an estate — the relevant question was never whether it beat an index over ninety days. It is whether the assets still line up against what they have to pay for, and when.
For fifteen years, investors were accustomed to asking what return capital could earn. The question returning to markets is more fundamental: what will capital demand before it agrees to show up? The bond market has begun to answer.
If you have questions about how any of this maps to your own allocation, or whether a sleeve has drifted far enough from target to act on, reach out. That is the conversation worth having now, not a prediction about the next turn.
Regards,
John Gorlow
President
Cardiff Park Advisors
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Past performance is no guarantee of future results. Index returns are for illustrative purposes and do not reflect actual fund performance. You cannot invest directly in an index. The opinions expressed are those of Cardiff Park Advisors and are subject to change without notice. This material is for informational purposes only and should not be considered investment advice.
Sources: Dimensional Fund Advisors Returns Program and quarterly market review, Avantis Investors monthly field guides (June and July 2026), U.S. Bureau of Labor Statistics, U.S. Department of the Treasury, CME FedWatch. Market data as of June 30, 2026 except where a later date is noted.