Markets bounced broadly in June, led yet again by the familiar rallying cry of US exceptionalism.
US equities rallied +5.1%, shrugging off softer economic data, while European stocks fell -1.1%. Japan’s Nikkei was the standout performer, surging +6.8%, with Emerging Markets close behind at +6%. Australia’s ASX 200 rose a more modest +1.4%.
Sector leadership in the US remained narrow, dominated by Technology (+9.7%) and Communication Services (+7.2%). In contrast, Australia saw a different mix - Technology lagged (+0.5%), while Energy (+8.9%) and Financials (+4.3%) led local gains.
Fixed income provided some ballast, though not uniformly. US 10-year Treasury yields fell 17bps, Australian 10-year yields declined 10bps, while German 10-year bund yields bucked the trend, rising 11bps.
Currency markets saw the USD resume its downward trend. The Euro rallied +3.9% for the month, while the AUD rose +2.3%, outperforming other commodity-linked peers like the CAD, NOK, and NZD.
On the macro front, the Atlanta Fed’s GDPNow forecast for Q2 growth was revised down from 3.8% to 2.9% over the month, pointing to slowing US momentum. The Fed kept rates on hold in June, but market pricing shifted further in a dovish direction, expecting four cuts by year-end. In Australia, the RBA didn’t meet in June, but markets continue to price in three rate cuts before year-end.
Too much optimism in an uncertain world
At Human Financial, we think investor sentiment has drifted well ahead of reality. Markets are pricing in a soft landing, lower inflation and uninterrupted earnings growth—all while geopolitical risks are arguably at their highest point in decades.
Geopolitics, by nature, are asymmetric—they rarely deliver upside surprises. The best outcome is often just avoiding the worst. But today, the list of active flashpoints is long and growing:
Russia–Ukraine: Escalating attacks, targeting infrastructure and shipping.
Israel–Hamas and Iran–Israel: Nearing direct conflict, with the US increasingly drawn in.
Strait of Hormuz: Oil tankers colliding amid suspected GPS jamming; a critical chokepoint for global energy supply.
India–Pakistan: Tensions flaring again.
Tariffs and trade wars: US tariff risks are back on the table with Trump’s proposed TACO (Tariffs on All Chinese-Origin) plan looming if he wins.
Nuclear risks: Nine nuclear-armed states, many directly or indirectly involved in active conflicts.
Oil spiked over 20% during the month before settling to finish June up 10%. Any further escalation could push it materially higher—bringing inflation risks back just as central banks try to ease.
Adding to the concern is the quality of the recent rally. According to Bespoke Investment Group, stocks of the 858 loss-making companies in the Russell 3000 Index surged an average of 36% year-to-date, while the 500 cheapest (lowest P/E ratio) stocks rose just 16%. This is a textbook sign of overly speculative risk-taking: markets rewarding story over substance.
It’s no coincidence the Fed paused in June, explicitly citing concerns about renewed inflationary pressures. However, if President Trump makes good on his threat to replace Jay Powell with a Fed Chairman more inclined to cut rates, this could introduce additional inflationary concerns.
Positioning from here
Volatility has picked up, but markets still aren’t fully pricing in the scale of these geopolitical and macro risks. Earnings expectations remain optimistic, especially in the US. While history shows markets can climb walls of worry, ignoring rising geopolitical headwinds is rarely a winning strategy.
As a result, our strategy remains: Stay diversified. Stay defensive. Stay realistic.