Granite quarterly update
Equity markets had one of their best quarters since Q2 2020, with AI remaining a key performance driver.
What happened in the quarter?
The U.S.–Iran conflict remained the defining macroeconomic event of the second quarter (Q2), following a period of elevated geopolitical volatility in Q1. The ongoing conflict drove a surge in energy prices and higher headline inflation. Conditions shifted later in the quarter as ceasefire discussions advanced, leading to a sharp decline in oil prices into quarter end.
Fixed income markets remained under pressure as inflation increased. Global central banks communicated a shift toward tighter monetary policy, with the European Central Bank raising its policy rate during Q2. In the U.S., Kevin Warsh became Chair of the U.S. Federal Reserve on May 22 and has since struck a notably less accommodating tone than markets had expected.
Despite higher inflation risk and the potential for tighter central bank policy, equity markets had one of their best quarters since Q2 2020. Gains were led by technology, with AI remaining a primary catalyst. Demand for AI infrastructure and semiconductors remained robust, driving strong earnings that exceeded expectations across key AI-linked companies and reinforcing confidence in the theme’s durability. SpaceX’s initial public offering (IPO) on June 12 – the largest on record – highlighted strong investor demand for AI and next-generation technology, with shares rising 19.2%1 on the first day of trading. Energy was the weakest sector, reversing earlier gains as oil prices declined with fading geopolitical risk.
International equities underperformed the U.S., with a stronger U.S. dollar weighing on returns. Canadian equities delivered positive returns but lagged the U.S.
1Source: Bloomberg. SpaceX closed its Nasdaq debut on June 12, 2026, at U$160.95 per share from an IPO price of U$135.
| Top contributors/detractors | |
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+ Tactical positioning: The Granite Portfolios’ tactical overweight to equities contributed positively to performance.
- Manager selection: Equity manager selection detracted from performance.
- Tactical positioning: Overweight exposure to gold and oil also detracted.2
+ Strategic allocation: Emerging market equities had another a strong quarter, contributing significantly to returns. |
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2Indirect exposure to gold and commodities is achieved by investing in underlying ETFs that seek to replicate the performance of the price of gold bullion and the broad commodity market, respectively.
What changes did we make?
We began Q2 with a significant overweight to equities as our market sentiment indicator correctly anticipated a market bottom in late March. We further added to this exposure in April as we believed momentum would continue in equities as AI-related stocks saw extremely strong demand. In late April and late May, our risk-off indicator indicated that equities could experience a pull back, which we used as an opportunity to not only take profit but also to capture additional gains.
Within U.S. equities, our proprietary sector rotation model guided the Granite Portfolios toward more cyclical exposures to participate in the market recovery. This allocation detracted value in April and May, as market gains became concentrated in a handful of AI-driven technology stocks. We shifted to a more defensive stance in June, adding health care and consumer staples, which delivered strong performance toward quarter end. However, this strategy ultimately underperformed slightly over the quarter. Additionally, as the U.S.–Iran conflict neared a resolution, maintaining tactical exposure to gold and oil detracted from performance.
Q2 tactical asset class positioning
Data as of June 30, 2026. Each line in the chart below shows the range of positions taken during the quarter. Triangles represent beginning of quarter and circles represent quarter-end positioning.
What’s next?
Entering Q3, we’re focused on three themes: central bank policy, the durability of the U.S.–Iran ceasefire, and the strength of the AI-driven equity rally.
June and July inflation data releases across major economies should serve as key indicators of how central banks are likely to respond in the months ahead. While markets are pricing a path for rate hikes, we view this as overstated given the sharp correction in oil prices. If inflation data confirms easing energy price pressures, central banks may have less need to further raise rates, even as services inflation remains elevated.
The rotation away from energy and materials in Q2 reflects falling oil prices as U.S.–Iran ceasefire progress reduced supply risks. The durability of this shift will depend on whether Strait of Hormuz flows normalize and the ceasefire holds. Any re-escalation could reverse recent declines in oil prices and challenge the inflation outlook.
In equities, earnings season should once again be the main test of whether the AI-driven rally remains supported by fundamentals. Late July and August earnings results from major technology companies will be closely watched for continued strength and sustained capital spending on AI infrastructure. Focus is also increasing on AI-driven efficiency gains and their impact on employment, adding a new layer of uncertainty to the broader outlook. All of this could point to greater dispersion in the second half of the year.
Based on our outlook, we enter Q3 2026 with an overweight to equities and commodities and an underweight to cash and bonds. This reflects our view that the market environment should remain supportive but more selective after a strong Q2, with inflation shifting from a geopolitical shock to a potentially persistent risk embedded in markets.
View fund performance (Series F)
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