Institute Alert

• The U.S and Iran claim to be continuing talks with negotiators, but their renewed attacks against each other have focused on control of the Strait of Hormuz, leaving commercial shipping unable to cross the Strait.
• European Brent and U.S. West Texas Intermediate Crude Oil prices overnight continue rising since the attacks intensified last week, nearing their highest price levels following the June 17 U.S.-Iran Memorandum of Understanding.
• Major global equity indexes are mostly lower overnight, especially in Asia, which imports 60% of its energy from the Persian Gulf. The nearby S&P 500 and Nasdaq 100 Index futures contracts are off fractionally, continuing to trade in a narrow range since hitting all-time highs on June 2.
• Also, valuations for some technology (tech) and artificial intelligence (AI) related companies are returning to the spotlight as investors question the sustainability of tech-related spending amid rising global interest rates.
• We see the market separating “AI beneficiaries” from “AI spenders.” Semiconductor companies are viewed as direct recipients of hyperscaler AI capital expenditure (capex), while many software, internet, and broader tech names are either funding that capex or facing pressure to show returns from it. While the broader market and other tech stocks lost some momentum, semiconductor companies have generally been up.
• The U.S. 10-year Treasury note yield is slightly higher overnight and for the month to-date, trading near 4.60%, as higher oil prices have revived long-term inflation concerns.

• We anticipate global energy prices to rise in the near term but that a return to oil and natural gas flows similar to pre-war rates will return later this year and into 2027.
• While higher interest rates generally remain a risk for global equity markets, our view is that interest rates may return to previous levels as the energy shock fades.
• However, until something changes with the status of the Strait, we believe the bias remains for higher oil prices and, in turn, higher expected inflation and interest rates, and episodes of equity price volatility.

• Amid these uncertainties, we favor anchoring expectations around likely S&P 500 Index earnings growth of more than 20% in 2026, supported by a resilient economy and the structural shift toward AI investment, which we see benefitting sectors beyond technology.
• The prospect of additional uncertainty and potential volatility does not derail our outlook, and we continue to favor using market volatility as opportunities to rebalance portfolios.
• We see diversification opportunities in Fixed Income and Commodities, where attractive bond yields and exposure to Precious and Industrial Metals can help improve portfolio resilience amid market volatility.

First, we believe investors should remain disciplined and avoid overreacting to short-term market volatility. Volatility and shifting headlines were a key theme of our 2026 Outlook, and we continue to see equity markets supported by fundamental strengths, including a resilient U.S. economy, along with robust revenue and earnings growth for U.S. Large Cap companies. Therefore, we maintain our overweight to equities and believe investors are best suited in maintaining allocations to U.S. Large Caps as they are better positioned to navigate market volatility due to their strong balance sheets and track record for earnings.

Second, we continue to favor Information Technology and AI-related sectors. Although valuation concerns have resurfaced, the sector continues to deliver revenue and earnings growth well above the broader S&P 500 Index. Additionally, we emphasize that the key drivers of the AI investment cycle, including the need for digital infrastructure, rising computing demand, and enterprise adoption remain in-tact. We view these trends as structural changes that will drive sector performance over the coming years, and benefit enterprises beyond just tech. Given the recent pullbacks, we believe the case for long-term investors does not weaken, but instead strengthens as those looking through the recent volatility can gain exposure to high quality tech companies at more attractive valuations.

Third, we believe investors seeking to broaden diversification beyond tech should consider adding from other opportunities. Beyond the Information Technology sector, our first choices among U.S. large-cap equity sectors include Materials, Utilities, and Financials. Industrials is also among our favored sectors but looks somewhat more expensive right now than these others. Financials offer exposure to financial deregulation and improving investment banking conditions. The other sectors offer potential opportunities to long-term themes including infrastructure investment, electrification, rising power demand, and AI-related capital expenditure.

Lastly, we believe investors can further strengthen portfolio diversification by considering positions in Fixed Income and Commodities. Bonds often behave differently than stocks. When equity markets fall because of uncertainty, high-quality bonds may provide income, stability, and a smoother ride. While today’s yields across most maturities are above those available during most of the past decade we would avoid long-dated maturities given higher levels of inflation and policy uncertainty may lead to higher volatility. We also favor a full allocation to Commodities as an effective portfolio diversifier and hedge against inflation and geopolitical risks. Specifically, we see opportunities for investors to rotate exposure from energy, where we see downside risks, and into Precious Metals or Industrial Metals.

Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets, especially foreign markets, are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Bonds are subject to market, interest rate, price, credit/default, liquidity, inflation and other risks. Prices tend to be inversely affected by changes in interest rates. Although Treasuries are considered free from credit risk they are subject to other types of risks. These risks include interest rate risk, which may cause the underlying value of the bond to fluctuate. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investing in a volatile and uncertain commodities market may cause a portfolio to rapidly increase or decrease in value which may result in greater share price volatility. Investing in gold, silver or other precious metals involves special risk considerations such as severe price fluctuations and adverse economic and regulatory developments affecting the sector or industry.

Sector investing can be more volatile than investments that are broadly diversified over numerous sectors of the economy and will increase a portfolio’s vulnerability to any single economic, political, or regulatory development affecting the sector. This can result in greater price volatility. The Energy sector may be adversely affected by changes in worldwide energy prices, exploration, production spending, government regulation, and changes in exchange rates, depletion of natural resources, and risks that arise from extreme weather conditions. Investing in the Financial services companies will subject an investment to adverse economic or regulatory occurrences affecting the sector. There is increased risk investing in the Industrials sector. The industries within the sector can be significantly affected by general market and economic conditions, competition, technological innovation, legislation and government regulations, among other things, all of which can significantly affect a portfolio’s performance. Materials industries can be significantly affected by the volatility of commodity prices, the exchange rate between foreign currency and the dollar, export/import concerns, worldwide competition, procurement and manufacturing and cost containment issues. Risks associated with the Technology sector include increased competition from domestic and international companies, unexpected changes in demand, regulatory actions, technical problems with key products, and the departure of key members of management. Technology and Internet-related stocks, especially smaller, less-seasoned companies, tend to be more volatile than the overall market. Utilities are sensitive to changes in interest rates, and the securities within the sector can be volatile and may underperform in a slow economy.

Diversification does not guarantee profit or protect against loss in declining markets.

NASDAQ 100 Index consists of the 100 biggest companies listed on the NASDAQ Composite Index. The list is updated quarterly and companies on this Index are typically representative of technology-related industries, such as computer hardware and software products, telecommunications, biotechnology and retail/wholesale trade.

S&P 500 Index is a market capitalization-weighted index composed of 500 widely held common stocks that is generally considered representative of the US stock market.

An index is unmanaged and not available for direct investment.

Global Investment Strategy (GIS) is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.

The information in this report was prepared by Global Investment Strategy. Opinions represent GIS’ opinion as of the date of this report and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.

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