The first quarter of 2026 was marked by the sudden outbreak of war in the Middle East; the

second quarter was shaped by a complex and often bewildering effort to bring the conflict to an

end. At the beginning of the quarter, the world was entering its second month of a rapidly

escalating war. Traffic through the Strait of Hormuz, one of the world’s most critical energy

chokepoints, had effectively stopped, creating a historic supply disruption that pushed oil prices

well above $100 per barrel and fueled speculation that prices could climb as high as $200. By

quarter end, however, a fragile but holding ceasefire was in place, along with a signed

Memorandum of Understanding outlining a framework for negotiations between the United

States and Iran. While this uneasy balance leaves many uncertainties unresolved, it has been

sufficient to send oil prices back to roughly $70 per barrel completing a full round trip from

where they stood before the conflict erupted just four months earlier. As tensions eased,

shipping activity through the strait gradually resumed, reaching approximately half of prewar

volumes by the end of June.

The U.S. economy also demonstrated greater resilience to the energy shock than many had anticipated. Following annualized growth of 2% in the first quarter, economic activity appears on track to remain near trend in the second quarter, with the Atlanta Fed’s GDPNow estimate currently projecting growth of 2.5%.

Much of this strength continues to be driven by robust business investment, particularly in equipment and intellectual property associated with the ongoing artificial intelligence (AI) expansion. In fact, AI related investment accounted for more than half of first quarter GDP growth.

The labor market likewise remained healthy and may even be regaining momentum. Over the past three months, employers added an average of 188,000 jobs per month while the unemployment rate held steady at 4.3%, easing concerns that last year’s labor market stagnation could deteriorate into a more pronounced slowdown.

Equity Markets:

Second quarter earnings for S&P 500 companies are projected to increase 23% year over year

when results are reported in July, marking a meaningful improvement from the 19% growth

analysts expected at the start of the quarter. Looking ahead, full-year 2026 earnings are

forecast to grow between 21% and 23%, providing a strong foundation for U.S. equities to

absorb higher interest rates and potentially recover ground lost earlier in the year.

Notably, earnings growth has expanded beyond technology, signaling improved profitability across

profitability across a wider range of industries. This expanding participation has contributed to

the year-to-date outperformance of the equal weighted S&P 500 relative to the traditional

capitalization weighted index.

Fixed Income Markets:

The Federal Reserve’s shift toward a more hawkish stance in response to rising commodity

prices pushed interest rates higher across the yield curve. However, the increase was most

pronounced at the short end, resulting in a flatter yield curve as short-term rates rose more than

intermediate- and long-term yields. Historically, a flattening yield curve has often signaled

expectations for slower economic growth or future monetary easing.

With the conflict involving Iran appearing to de-escalate and energy prices retreating, there may

be room for yields across the curve to move lower. That said, the resilience of the U.S. economy

suggests that some degree of curve steepening is more likely. Under this scenario, short-term

rates could decline while intermediate and long-term yields remain near current levels through    

the remainder of the year.

Another factor that may limit declines in intermediate- and longer-term yields is the continued

growth in federal budget deficits. Elevated government borrowing needs could make investors

more cautious about aggressively bidding up bond prices, even as the inflation outlook

improves. This dynamic may contribute to a steeper yield curve over time and could be even

more pronounced in countries facing similarly large fiscal deficits, where concerns about

Government debt levels may exert additional upward pressure on longer-term interest rates.

(MSR) Mortgage Servicing Rights Insights:

The Second Quarter 2026 Mortgage Servicing Rights (MSR) market is defined by intense

valuation volatility, a severe divergence between low and high coupon portfolios and shifting

regulatory frameworks. While MSR assets continue to function as a crucial macroeconomic hedge

for independent mortgage banks (IMBs) and regional banks, sharp interest rate swings driven

by geopolitical tension and persistent inflation have introduced earnings volatility.

MSR valuations continue to be supported by consistent investor demand and a generally stable

interest rate environment, although pricing remains sensitive to changes in rate volatility and

mortgage prepayment expectations.

The U.S. Treasury 10-year yield ended February at approximately 3.97%, down from 4.26% at

the close of January. Primary mortgage rates also declined modestly during the month,

increasing near-term refinance incentives and creating some additional pressure on MSR

valuations.

Bulk Agency MSR pricing remained largely stable to slightly stronger on a month over month

basis. Most portfolios continue to transact within a range of approximately 5.25x to 5.75x, while

well-seasoned, geographically diversified portfolios with strong performance characteristics can

still achieve valuations near or above 6.0x. Pricing dispersion remains elevated, with execution

increasingly influenced by factors such as collateral composition, note rate distribution,

recapture opportunities, and buyer-specific return requirements, rather than by broader interest

rate movements alone.

Grander’s Outlook:

During the second quarter of 2026, investor sentiment remained broadly positive despite heightened geopolitical uncertainty. While tensions in the Middle East have shown signs of easing, conditions remain dynamic and the longer-term implications are still uncertain.

Nevertheless, robust investment in artificial intelligence infrastructure continues to provide a meaningful tailwind to economic activity, while government spending is expected to strengthen and contribute further support. Our base-case outlook assumes that the economic effects of the Middle East conflict will be limited and manageable, with the key drivers of global growth regaining momentum and operating more fully by 2027.