North American
Portfolio

The Federal Reserve held the policy rate at 3.50-3.75% through the quarter, but the 17 June Summary of Economic Projections delivered a hawkish surprise. The updated dot plot showed a 3.8% median policy rate projection for 2026, with nine members supporting further increases. Officials also raised their 2026 headline PCE inflation forecast to 3.6% from 2.7% in March, while the core PCE forecast increased to 3.3%.

Market pricing shifted decisively from an expectation of forthcoming rate cuts toward a “higher for longer” regime. This was more than a routine policy hold: it represented a material change in the rates backdrop, with implications for duration sensitive equities, infrastructure valuations and portfolio hedging.

Growth nevertheless remained resilient. Equity markets more than reversed their earlier 2026 declines as Middle East conflict risk de escalated, with technology leading the rebound after underperforming earlier in the year. Credit conditions also showed tentative signs of stabilisation, including tighter private credit spreads and firmer business development company equity prices.

The underlying economic picture remains bifurcated. Strong AI capital expenditure and productivity growth are offsetting a consumer sector that is becoming increasingly reliant on wealth effects rather than income growth as real wages compress. The quarter can therefore be characterised as “resilient at the headline level, but fragile underneath” a constructive environment for structural AI and power infrastructure investment, but one that still warrants disciplined position sizing and active downside risk management.

North American Energy Transition Q2 2026: The Interconnection Bottleneck Becomes a Policy Story

The defining shift this quarter was not demand growth that has been the story since 2024 but the migration of the constraint from capital availability to physical delivery. Washington increasingly treated the interconnection bottleneck as a national policy priority rather than a market imbalance that would resolve on its own.

FERC’s 18 June intervention was the quarter’s most consequential policy event. Rather than pursuing a multi year rulemaking, FERC used Section 206 show cause authority to give all six RTOs and ISOs 60 days to justify or rewrite their large load interconnection tariffs, alongside a 30 day resource adequacy reporting requirement. Under the emerging framework, data centres would bear their own interconnection costs, helping to protect ratepayers while reducing the procedural delays that have made grid connection the longest lead time item in data centre development.

This represents a genuine regime change in how large loads not only generation are regulated at the federal level. Implementation will not be frictionless. State regulators, including NARUC, have argued that federal standardisation could limit states’ ability to respond to regional conditions and protect affordability. Litigation and jurisdictional risk are therefore likely to run alongside implementation through the third and fourth quarters.

Co location is becoming the dominant workaround, and it is reshaping capital allocation. On site and behind the meter generation is projected to account for approximately 30% of new data centre capacity in 2026, up from near zero a year earlier, with some forecasts suggesting it could reach 50% as hyperscalers secure direct generation partnerships. This creates a structural tailwind for gas turbine OEMs, SMR developers, storage providers and distributed power platforms.

The same shift also introduces stranded asset risk for utilities. Capacity planned to serve large load customers may never be required on the public grid if hyperscalers increasingly bypass traditional interconnection pathways. The key investment distinction is therefore moving from simple exposure to power demand toward exposure to the assets and technologies that shorten time to energisation.

The gas versus renewables mix has moved more decisively toward gas than consensus expected six months ago. Natural gas’ share of planned data centre capacity increased from 11.1% to 18.1% between 2024 and 2026. Non renewable additions rose approximately 71% from 2025 to 2026, while renewable growth flattened to around 2%. One important driver is economics: natural gas interconnection costs are estimated at roughly one tenth those of solar and offshore wind.

For the portfolio thesis, this complicates the view that AI demand will pull clean energy deployment forward in a straight line. In the near term, AI demand is accelerating gas deployment more rapidly, while decarbonisation appears as a second order effect through storage, SMRs, efficiency and distributed generation rather than through bulk renewable grid supply alone.

The issue has also become a rates and inflation story. Data centre driven electricity demand has been estimated to add approximately 0.1 percentage points to core inflation in both 2026 and 2027, concentrated in PJM states, alongside a 2.3% year on year rise in national retail electricity prices. This creates a new macro transmission channel linking AI infrastructure demand, regional power inflation and Federal Reserve policy.

Q3 watch list: RTO compliance filings due in mid August; additional state level pushback or litigation; and whether the PJM emergency capacity auction structure under which technology companies fund new plants directly is replicated elsewhere. These developments should provide the clearest read through on which infrastructure companies capture the co location capex cycle and which utilities face the greatest stranded asset risk.

Reading the Market’s Second Layer

A quiet surface over a loud market.

On the surface, June looked uneventful. The S&P 500 drifted to record highs and volatility stayed low. If you only watched the index, there was nothing to see.

We don’t only watch the index. We track equity risk on three levels: what the options market charges for protection on the index, what it charges on the individual companies inside it, and how options dealers are positioned — because their hedging either cushions the market or accelerates it.

The first two levels have precise, published measures. The VIX prices thirty-day volatility on the S&P 500 as a whole. Its newer companion, the Cboe S&P 500 Constituent Volatility Index (VIXEQ), applies the same calculation to the individual stocks inside the index, weighted by their size — in effect, what the market charges to insure the average large American company rather than the basket. The two can diverge dramatically, and the gap between them is itself an index: the Cboe Dispersion Index (DSPX). When constituent volatility (VIXEQ) is high but index volatility (VIX) is low, the arithmetic permits only one explanation — stocks are expected to move a lot, just not together. The degree to which they move together is correlation, and it can be read directly from these three numbers.

That is exactly what June priced, to a record degree. VIXEQ finished the month near its highs — the average large-cap stock was priced to move at roughly three times the volatility of the index containing it, a relationship at the widest levels in the data’s history. Implied correlation among S&P 500 constituents ended the month near the lowest ever recorded. The calm index was an accounting artefact: AI infrastructure names repricing higher, rate-sensitive sectors falling, the two cancelling in aggregate. A quiet surface over a loud market.

The third layer: how dealers are positioned

Price alone doesn’t tell us how a shock will behave once it starts — whether it will be absorbed or amplified. For that we watch options dealers’ aggregate gamma exposure (GEX): the degree to which dealers must buy into a rally or sell into a decline to stay hedged, as a mechanical consequence of the options positions they’ve written to the market. When dealer gamma is positive, their hedging flow leans against the market and dampens moves — a “pinning” effect. When it turns negative, their hedging flow leans with the market and can accelerate a move in either direction. This is not a market view; it is a structural fact about who holds which options, and it changes day to day.

June’s most instructive episode illustrated exactly why we track this alongside price. A macro scare lifted index volatility (the VIX) more than 40% in four sessions. Alarming, on its face. But VIXEQ barely moved — the price of insuring individual companies was essentially unchanged, meaning the spike was entirely a repricing of correlation, not of risk. Dealer positioning corroborated the same read: the move had the signature of a fast, mechanical correlation event rather than a genuine reassessment of company-level risk. That combination — VIX up, VIXEQ flat, dealer flow consistent with a technical unwind rather than fresh selling — told us the episode would likely pass rather than persist. It did, within days. We held positions and hedges rather than paying the market’s worst prices to reduce either. Knowing which volatility to respect and which to fade is where this work pays for itself, and dealer positioning is often the tie-breaker between the two.

Implied volatility and where the yield comes from

The yield side of the programme lives inside the same data. Options premium is priced off implied volatility, and June’s dispersion meant implied volatility on individual holdings — particularly across AI-power, grid, and infrastructure-adjacent names — sat well above the volatility implied by the index itself. Writing calls against selected individual holdings in that environment captures materially more income per unit of upside surrendered than writing at the index level would; we rank holdings by where their implied volatility sits relative to their own recent history before sizing any call-writing, and we scale the programme back automatically when dealer positioning turns unfavourable, since rich premium in that setting is compensation for gap risk rather than free income.

While the overlay’s contribution in any single month will vary, the framework pays over time in three ways. When single-stock premiums are rich relative to the index — as they were most of June — our call-writing shifts toward individual holdings, collecting more income for each unit of upside we give away.

The same imbalance makes index protection unusually cheap, so we buy insurance before the storm, not after. And dealer positioning gives us an early read on whether market structure will absorb the next shock or amplify it — disciplining both how large our hedges run and when we pause premium harvesting altogether.

Wide dispersion under a calm index is, in the end, a stock-picker’s market — the environment our strategies are built for. It is also one of the rare periods when caution costs almost nothing. We are positioned for both.