MARKET UPDATE [JUNE 2026]

MARKET OVERVIEW

Throughout June, global markets were shaped by major corporate transactions, evolving artificial intelligence (AI) policy, persistent inflation concerns, and central bank decisions. Manufacturing activity remained resilient across the U.S. and China, supported by expanding factory output, stronger construction spending, and stable purchasing managers' indexes despite rising input costs.

Artificial intelligence remained a dominant theme. President Trump signed an executive order requiring leading AI developers to provide the U.S. government with access to advanced models before public release and directed agencies to address software vulnerabilities identified by frontier AI systems. Anthropic urged leading AI laboratories to consider slowing the pace of AI development due to concerns over rapidly advancing self-improving systems, while OpenAI explored significant price reductions to remain competitive as the industry prepared for anticipated public listings. Later in the month, OpenAI also restricted access to certain advanced models, citing government security concerns. Meanwhile, major technology companies continued to expand AI infrastructure, although concerns grew over environmental impacts, highlighted by Amazon's substantial water consumption at its global data centers.

Economic data presented a mixed but generally resilient picture. U.S. labor market conditions remained solid, with payroll gains consistently exceeding expectations, supported by strong hiring in leisure, hospitality, healthcare, and construction. Although jobless claims fluctuated modestly throughout the month and voluntary job quits eased slightly, employment remained healthy overall. Canada's labor market also outperformed expectations, posting strong job creation despite broader economic weakness. Manufacturing activity strengthened in the U.S. and China toward month-end, while service-sector growth remained more subdued as elevated prices and weaker consumer confidence weighed on demand.

Inflation remained a central concern for policymakers. U.S. inflation climbed to multi-year highs, driven largely by higher energy prices linked to Middle East tensions and continued AI-related infrastructure investment. Canada's inflation outlook also remained elevated, prompting the Bank of Canada to leave its policy rate unchanged at 2.25% while balancing weak economic growth against persistent price pressures. Globally, central banks adopted increasingly cautious or hawkish positions. The Bank of Japan signaled additional rate increases as inflation risks intensified, Australia held rates while warning of further tightening, the European Central Bank suggested additional hikes remained possible, and the Federal Reserve maintained current rates while indicating a growing number of policymakers expected future increases.

Geopolitical developments significantly influenced financial markets. Escalating tensions between the U.S. and Iran drove sharp swings in oil prices and inflation expectations, although markets later stabilized after diplomatic progress reopened the Strait of Hormuz and allowed Iran to resume selling oil in U.S. dollars. President Trump also threatened new tariffs on countries imposing digital services taxes while North American trade discussions resumed ahead of the USMCA renewal deadline. Canada continued to experience economic headwinds from U.S. tariffs and domestic immigration policy changes, contributing to several quarters of weak economic growth.

Corporate news remained active across multiple sectors. SpaceX completed the largest initial public offering in history, briefly reaching a market valuation above $2 trillion. Wix.com announced workforce reductions as part of an ongoing restructuring, while Comcast unveiled plans to separate its media assets into an independent public company. Tesla reported a sharp rebound in European sales, Micron delivered exceptionally strong earnings amid expectations that the global semiconductor shortage will persist beyond 2027, and Apple raised prices on several products in response to higher memory costs. Additional developments included Alibaba's legal challenge to its U.S. military designation, Airbus inspections following structural concerns, and continued expansion plans by major semiconductor manufacturers.

Trade, logistics, and consumer activity also evolved throughout the month. Rising trucking and shipping costs prompted U.S. companies to diversify logistics networks amid ongoing geopolitical uncertainty. Canada's retail sales and trade surplus strengthened, while U.S. retail sales, consumer sentiment, and home sales generally improved despite elevated borrowing costs. China's consumer spending weakened even as manufacturing activity recovered toward the end of the month, reflecting uneven global demand.

MARKET OUTLOOK

Our base case remains that inflationary pressures will intensify and push monetary policy from a dovish stance toward a more hawkish one. This view has largely played out, as global central banks continue to identify inflation as a greater risk than labor market weakness. The recent easing of U.S.–Iran tensions has slowed the pace of this scenario, which remains favorable for our equity positioning because time and market efficiency are key drivers of returns in our core holdings. While lower energy-price pressure may reduce the risk of an immediate inflation surge, other forces continue to support price growth, including stronger manufacturing activity, AI-related data infrastructure investment, higher consumption, and broader fiscal support. Overall, our base case remains intact: the Federal Reserve is increasingly likely to reverse its easing path and move toward a renewed rate-hiking cycle.

Estimating when inflationary pressure will fully flow through to equity markets requires some judgment. However, our analysis suggests that an effective federal funds rate of 4.33% would likely place markets in that environment. One way to assess the likelihood of this outcome is to examine target-rate probabilities implied by 30-day federal funds futures prices.

As of the end of June 2026, markets were meaningfully pricing in this scenario as early as December 2026. The implied probability of the federal funds target range reaching 4.25% to 4.50%—consistent with our 4.33% threshold—was 10.8% (Figure A). That probability rises modestly and then remains relatively stable in March 2027 federal funds futures and beyond (Figure B). For now, this supports staying disciplined with our current investment approach. Time remains in our favor, though the window is gradually narrowing. We will continue to monitor this risk closely as markets assess what we believe is the most important threat to the outlook.

FIGURE A

FIGURE B

PORTFOLIO OVERVIEW

During the month, we continued to reassess and add to our existing business holdings while expanding our composite dataset. Insurance underwriting remains a key focus, as it supports the generation of organic cash flow that can help fund ongoing operations and investment activity. At the same time, building our historical investment case database remains our highest priority because it directly supports our investment decision-making process. We increased the dataset from 75 cases last month to 118 cases, materially improving the sample size and strengthening our ability to evaluate the strategy through a historical lens. Based on a broader list of companies that fit our study criteria, we estimate that roughly 150 additional cases can be added over the next two months, giving us a more comprehensive dataset to analyze and use as a guide. Although we are still far from fully understanding every dynamic within this area of the market, we view this work as a lifelong discipline: continuously learning about industries, assessing plausible scenarios, and improving the quality of our investment operations over time.

With that context, we will share three core findings and related updates from our current dataset that we believe are meaningful for shaping our perspective and investment stance going forward.

Core Finding #1

Fundamental Drivers of Investment Success

Much of modern investment theory focuses on measuring business quality through financial ratios and forecasting future growth with increasing precision. Yet our financial data from our historical investment cases suggests that long-term returns are often driven by a different set of factors. The greatest opportunities frequently emerge not from finding perfect businesses, but from understanding the relationship between time, investor pessimism, expectations, and survivability.

1.       Time is the investor's greatest ally; longer holding periods increase the probability that intrinsic value and market value converge.

Our internal studies show the most powerful force in investing is time. A productive business compounds value through retained earnings, operational improvements, and the gradual accumulation of competitive advantages. While market prices fluctuate continuously, the intrinsic value of a sound enterprise tends to stably grow over extended periods. As a result, the longer an investor can remain a rational owner of a business, the greater the opportunity for the economics of that business to work in their favor. Simply put, time allows both the business and the investment thesis to mature, transforming modest gains into substantial wealth.

2.       Exceptional returns are often born from exceptional adversity, provided the underlying business remains viable.

The conditions surrounding the initial purchase are equally important. Periods of adversity, often characterized of sizable drawdowns and street-wide market pessimism, often create the most attractive opportunities because markets tend to overreact to uncertainty. Prices often fall far below what is justified by the long-term earning power of the business. While some companies deserve their decline, many are simply navigating temporary challenges. When pessimism becomes excessive, future returns are enhanced because the investor acquires a larger claim on future cash flows for a much lower price.

3.       Return potential rises as growth expectations fall; the best opportunities emerge when little future success is priced in.

Closely related to this idea is the role of expectations. High growth businesses often command premium valuations because investors are willing to pay today for profits that may not materialize for years in the future. The problem is that when growth is already embedded in the price, exceptional business performance may only justify the valuation rather than exceed it. Conversely, when little or no growth is reflected in the market price, the burden of expectation disappears. Under those conditions, even modest operational improvements can create substantial gains. The greatest opportunities frequently arise when expectations have fallen so low that positive surprises become far more likely than negative ones. Our studies capture this by evaluating each opportunity on dividends or aggregation of dividends and buybacks on a perpetuity basis.

4.       Survival precedes recovery; businesses with low bankruptcy risk possess the optionality required for successful turnarounds.

However, a low price alone is insufficient. A business must possess the financial strength necessary to survive long enough for a recovery to occur. Companies with manageable debt burdens, adequate liquidity, and limited bankruptcy risk retain valuable optionality. They have the ability to endure setbacks, adapt to changing conditions, and benefit from eventual improvements in their industry or operations. In contrast, a company facing severe financial distress may never have the opportunity to realize its underlying value. For this reason, the potential for a successful turnaround is often highest when adversity is significant but survivability remains intact.

5.       Future investment returns are explained less by conventional measures of business quality and more by the gap between market expectations and subsequent reality.

Perhaps most surprising is the limited explanatory power of many traditional financial metrics when it comes to forecasting future investment returns. Measures such as return on equity, return on invested capital, cost of equity, and weighted average cost of capital can provide useful insights into the current economics of a business, but they often say little about the returns an investor will ultimately earn. Investment performance is not determined solely by business quality. It is determined by the gap between expectations and reality. A high quality business purchased at an excessive valuation can produce disappointing returns, while an average business purchased amid extreme pessimism can generate exceptional results.

Ultimately, successful investing from our practical guide seems to be less about identifying statistical perfection and more about understanding the interaction between price, expectations, adversity, and time. Businesses purchased during periods of maximum pessimism, when growth assumptions have largely disappeared and bankruptcy risk remains manageable, often possess the greatest return potential. The investor's edge comes not from predicting the future with precision, but from recognizing when the market's expectations have become disconnected from the underlying reality of the business.

Core Finding #2

Commodity-based Businesses

For commodity-based businesses such as utilities and commodity suppliers, drawdown expectations depend on how changes in core commodity prices affect each company’s operating exposure. This enables us to include companies such as The Mosaic Company, Occidental Petroleum Corporation, Northland Power Inc., Canadian Natural Resources Limited, and Nucor Corporation in our historical investment case analysis with more reliable drawdown estimates. This is especially important given our focus on Canadian equities, where energy and commodity-based businesses represent a significant share of the market.

Core Finding #3

Fundamental Results on Composite of Historical Investment Cases

Our dataset includes 118 historical investment cases. Of these, 66 involve businesses we consider fundamentally understood—companies for which we can estimate a reasonable worst-case outcome, including an expected stock-price bottom based on business fundamentals, and where the market gave us a fair opportunity to buy at those levels. This subset represents the businesses we understand best and in which we believe we have the strongest investment edge. Although only 66 cases meet this standard, the smaller sample does not appear to reduce the value of the findings. First, these cases still span the periods when the best value opportunities emerged, suggesting we are not missing meaningful windows of opportunity. Second, if limited opportunities were a concern, our results show that waiting for attractive entry prices in businesses we understand can materially improve outcomes: average compounded annual growth rate (CAGR) rises by 10.41%, and average CAGR by 42.90%, driven by less holding period, and greater time spent waiting for attractive buying points. In other words, patience can be as effective as having more opportunities. Drawdowns also improved, declining by 3.58 % on average relative to our historical benchmark model.

 MANAGEMENT DISCUSSION & ANALYSIS

Key Changes to Fundamental Determinants of Market Growth and Risk.

S&P500 Market Cap (May → June): 68.825 trillion → 68.091 trillion

Analyst Consensus Earnings Forecasts (2026): 339.2 → 339.8

Model Earnings CAGR:  13.94% → 13.99%

S&P500 Aggregate Earnings (TTM) latest quarter estimates (in $ Billions):  617.34 → unchanged

S&P500 Aggregate Dividends (TTM) latest quarter estimates (in $ Billions): 165.16→ unchanged.

S&P500 Aggregate Buybacks (TTM) latest quarter estimates (in $ Billions): 249.00. → unchanged.

Model Payout Ratio: 77.85% → unchanged.

Implied Equity Risk Premium

The implied equity risk premium (IERP) represents the excess return investors demand for holding equities instead of risk-free government bond. As it is not directly observable, the IERP is estimated by discounting expected future cashflows, primarily aggregating dividends and share repurchases. At Baoro Research, we calculate the IERP each month at the market index level, utilizing it as an indicator of valuation conditions, investor sentiment, and consequently, potential market direction. As of April 2026, our estimate for the IERP stands at 4.54%, which remains notably below both the historical average of approximately 5.36% and the recessionary threshold of 6.16%.

Market Valuations

With an average equity risk premium of 5.36%, the adjusted implied fair value for the S&P 500 stands at 6306.67. Consequently, based on long-term averages, the market appears to be overvalued by 15.65%

S&P500 Value (IERP 6.16%)

An IERP of 6.16% is commonly observed during periods of economic downturns, which for value investors can indicate a suitable moment to reintroduce equity risk into portfolios. Should the current market narrative lead to challenging economic conditions, S&P500 valuations suggest prices could decrease to 5464.78    , a 26.88% decline from current levels. Despite the extent of this potential overvaluation, this remains the base case model, with the intention to reintroduce equity exposure if such a scenario unfolds.

S&P500 Value (IERP 6.91%)

An IERP of 6.91% is typically observed during periods of substantial market decline, such as at the height of the global financial crisis. Should a similar scenario arise, the index could experience further depreciation, with the S&P 500 potentially reaching 4853.09, which would be a decline of approximately 35.06%. While this extent of price decrease may appear improbable, it remains within the realm of possibility based on historical precedents. For instance, equity markets dropped 89% from peak to trough during the Great Depression (1929 to 1932), while during the dotcom bust and subsequent financial crisis, the Nasdaq Composite fell roughly 78% from its March 2000 high to its October 2002 low. Similarly, the S&P 500 and Dow Jones Industrial Average both declined by approximately 50 to 57% during the 2007 to 2009 financial crisis.

Multiples Lens

Due to variability in the inputs and outputs associated with the IERP model, a multiple-based valuation is also conducted. In this approach, cash flows are represented by the sum of aggregate S&P500 firms’ dividends and buybacks on a trailing twelve-month basis.

Data from our model indicates that the S&P 500 historically has an average price to cash flow ratio of 23.4. The multiples at plus or minus one standard deviation are 28.8 and 18.0, while the values at plus or minus two standard deviations are 34.2 and 12.6. Using the most recent trailing twelve months aggregation of firm dividends and buybacks, the following valuations are derived across these key multiples.

P/CF	Implied Index Lvl.
34.2 x	6324.70
28.8 x	5324.24
23.4 x	4323.78
18.0 x	3323.33
12.6 x	2322.87

Valuation Summary

Closing Remarks

As we continue to build our investment operation and expand our library of historical investment cases, our conviction in the portfolio has steadily increased. Studying businesses across many industries, from automobile manufacturers to consumer goods companies, has reinforced a simple observation: while every business is unique, the forces that shape long term outcomes are often remarkably similar. Competitive advantages weaken, management teams make capital allocation decisions, industries change, and investor expectations swing from excessive optimism to unnecessary pessimism. History rarely repeats itself exactly, but it often provides a useful guide. The larger our collection of historical perspective becomes, the better equipped we are to judge the opportunities before us today.

This process also reinforces our preference for concentration over broad diversification. We currently own 11 businesses that we understand well and believe offer attractive long-term prospects. When that is the case, searching endlessly for additional investments can become less productive than increasing our understanding of the businesses we already own. That does not mean we stop looking. We continue to study new companies every day, but we have no obligation to act unless we find an opportunity that is clearly superior to what we already own.

Alongside investment returns, we remain focused on generating organic cash flow. While this is a secondary objective, it provides us with greater flexibility to deploy capital when attractive opportunities emerge. We intend to accomplish this primarily through the disciplined underwriting of options on businesses we know well and would be pleased to own, while also offsetting a portion of our operating expenses. The objective is not activity for its own sake. It is to steadily increase the capital available for future investments.

As discussed in Core Finding #3, time remains one of the greatest advantages available to patient investors who have identified a great business. The willingness to wait, both for opportunities and for results, is often rewarded, although rarely on a convenient schedule. We believe the same principle applies to building this partnership. Progress is measured over years, not quarters, and nothing of lasting value is created overnight.

To our partners, thank you for your continued trust and patience. Your confidence allows us to think independently, remain disciplined, and focus on long term outcomes rather than short term distractions. We appreciate the opportunity to manage your capital and look forward to the work ahead.