IMG Q2 2026 Investor Letter

Welcome Summer!

 

From everyone here at IMG, we hope you had a safe and happy 4th of July. This year marks the 250^th anniversary of our independence, and the enthusiasm in and around Boston is palpable. For maritime fans, Boston is an official port of Sail250, a global gathering of tall ships and military ships. Meanwhile, the 2026 FIFA World Cup is underway, and Boston Stadium (aka Gillette) has been the host site of seven games. Whether you are a soccer fan or not, the matches have been riveting, much like the markets recently.

 

U.S. Economy

The economy is slowing but remains sound. Consumer spending increased 0.7% in May, following April’s  0.4% rise. Consumer spending is key to a healthy economy, fueling roughly two-thirds of economic activity, and the data shows that Americans continue to open their wallets in the face of high prices. Disposable personal income (personal income less personal current taxes) increased 0.7%. 

 

Ongoing concerns regarding high prices have undermined consumer confidence but falling oil prices in recent weeks have provided some relief. The Conference Board’s confidence index, which measures consumer attitudes on prevailing business conditions and likely developments for the months ahead, inched up 0.6 points in June to 91.2, up from a downwardly revised 90.6 in May. Conversely, the University of Michigan’s consumer sentiment index, which is used to estimate future spending and saving, rose 10.5% in June to 49.5. Still, sentiment remains in unfavorable territory at 13% below the February 2026 reading prior to the start of the Iran conflict, and nearly 20% less than a year ago. The cost of living remains at the forefront of consumers’ minds. Notably, for the third straight month, over half of consumers spontaneously mentioned that high prices are weighing down their personal finances.

 

The labor market seems to be turning a corner after a rough past 12 months driven by fear of artificial intelligence (AI) disruption and uncertainty over geopolitics and tariffs. ADP data showed private employers added 98,000 jobs in June. Considering the 122,000 jobs added in May and the 105,000 in April, this capped the best three-month stretch of hiring in more than a year. Notably, gains were more broad-based across industries, and hiring was spread evenly both by company size and geography. According to ADP Pay Insights data, wages for workers who changed jobs edged up to 6.6% in June while wages for those who stayed in the same job grew 4.4%. Separately, the Labor Department reported that the U.S. added 57,000 jobs in June, down from a revised 129,000 jobs in May, while the unemployment rate ticked down to 4.2% from 4.3%. Still, the job market appears to be on firmer footing than it was in the second part of last year. The economy added an average of 92,000 jobs each month over the first half of this year. For comparison, in the final six months of 2025 it shed 7,600 jobs each month on average.

 

The personal consumption expenditures (PCE) price index, which reflects changes in the prices of goods and services purchased by consumers in the U.S. and is the Federal Reserve’s (Fed) preferred indicator of inflation, increased 0.4% in May and is up 4.1% from a year ago. Excluding food and energy, the PCE price index increased 0.3% and is up 3.4 % from a year ago, above the Fed’s 2% target. Alternately, the producer price index (PPI), which tracks the price changes companies see before it hits consumers, increased 1.1% in May, matching April’s monthly increase and putting the 12-month wholesale inflation rate at 6.5%, the highest since November 2022. Excluding food, energy and trade services, core PPI rose 0.8% in May and is up 5.1% from a year ago. Rising fuel prices accounted for more than half of May’s advance in prices. Gasoline prices rose 23.4% at the wholesale level, the BLS said. Real gross domestic product (GDP), the broadest measure of economic output, increased at an annual rate of 2.1% in the first quarter of 2026 versus a 0.5% increase in the fourth quarter of 2025.

 

Kevin Warsh was sworn in as Federal Reserve (Fed) Chairman in May, taking the reins from Jerome Powell who had chaired the Fed since 2018. The Fed unanimously voted to hold interest rates steady at its June meeting, Warsh’s first meeting as chair, keeping the benchmark rate at a target range of 3.50% to 3.75%. The Fed’s policy statement was much shorter than past statements and stressed that the committee “will deliver price stability.” Still, markets read the Fed as more likely to raise rates after Warsh’s first meeting than prior to it.

 

Traditional Asset Class Returns Q2 2026

 

U.S. Stock Market

After declining 4.3% in the first quarter, the S&P 500 surged 15.2% in the second quarter. This marks its biggest quarterly gain in six years since the 20% rise in the second quarter of 2020, a rebound from the  "corona shock." Similarly, after falling 7% in the first quarter, the technology-heavy Nasdaq composite climbed 21.6% in the second quarter. Year to date, the S&P 500 is up 10.2% and the Nasdaq is up 13.1% (despite both indices retreating in June). The AI boom and infrastructure build-out powered much of the gains, but there was a sharp divide within the technology sector. High quality technology stocks underperformed the technology sector by almost 20% this quarter, with the Magnificent Seven falling amid concerns about heavy spending on technology and questions surrounding a return on that investment. On the flip side, other areas of technology such as semiconductors rallied as memory chip shortages and high memory pricing supported the sector. The Philadelphia Semiconductor Index (SOX), which comprises 30 major semiconductor-related stocks listed in the United States, rose 88%, marking its best quarterly performance since its inception in 1993. Notably, Micron and SanDisk were both up nearly 250%, yet neither company passes our quality screens. Whereas low quality and momentum have driven recent performance, we continue to believe that high quality companies with deep competitive moats and recurring revenues are best positioned to adapt to a changing landscape and navigate future surprises.

 

Seven out of 11 sectors posted positive returns in June. Year to date, nine out of eleven sectors are positive, with only Consumer Discretionary (-0.8%) and Financials (-1.2%) in negative territory. Industrials (+20.2%), Technology (+19.8%), and Energy (+19.7) were the top performing sectors in the first half of the year, fueled by AI memory bottleneck and the war with Iran.

 

From a style perspective, value continues to outperform growth in 2026. The Russell 1000 Value index finished the quarter up 2.3% while the Russell 1000 Growth index was down 2.7%. Year to date, the Russell 1000 Value is up 16.3%  and the Russell 1000 Growth index is up 5.3%,

 

Fixed Income

The fixed income market in the 2nd quarter was largely driven by the headlines coming from the Middle East. The yield curve fluctuated as peace negotiations worked towards a U.S.-Iran deal to reopen the Strait of Hormuz. The deal ultimately allowed movement of oil tankers to resume lowering the price of oil and helping to reduce inflation concerns. In addition to the concerns of the war’s impact on inflation, we also saw increased investor reservations about the already high level of U.S. debt plus additional future spending on the war. This sentiment sent the 30-year U.S. Treasury yield over 5% in May. The U.S. 10-year Treasury which started the quarter at 4.32% rose to 4.47% an increase of 15 basis points to close the quarter.

 

Looking toward the second half of the year, investors will be digesting upcoming Fed speak to get a hint on when and if a rate hike may occur. Moreover, the investment community will be monitoring inflation and other economic data releases as oil prices have moved lower with a fragile peace deal in place. As always, we continue to uphold the vital role bonds play in your investment portfolio providing diversification and stability in times of uncertainty.

 

Diversifying Asset Classes

All diversifying equity asset classes were positive for the quarter, save for Gold (-14.32%). Emerging Markets added to relative returns in the quarter, outperforming the S&P 500. Year to date, equity diversification has been beneficial, with Mid Cap stocks, Emerging Markets, Managed Futures and MLPs outperforming the S&P 500.

 

On both a quarter and year-to-date basis the U.S. Fixed income market produced positive returns across the board, with high yield being the strongest performer at 2.47% for the quarter. Corporate credit spreads (the premium paid over a risk-free government bond) remained exceptionally tight providing a tail wind to both U.S. high grade and high yield sectors as robust corporate earnings and strong balance sheets offset any concerns of geopolitical and inflation volatility. The U.S. Government Intermediate term index returned 0.18% for the quarter.

 

Conclusion

The economy remains healthy and inflation contained. We anticipate continued volatility in the market given ongoing geopolitical unrest and momentum trading, along with market participants continuously trying to identify the winners and losers in the AI evolution. Whereas markets rise and fall on news and emotion, long term performance is driven by solid fundamentals. Our team’s collective experience leads us to believe that now is most likely not a good time to chase the recent winners. We continue to construct portfolios to meet your long-term financial goals in all environments.