At run time, method invocation requires five steps. First, a target reference may be computed. Second, the argument expressions are evaluated. Third, the accessibility of the method to be invoked is checked. Fourth, the actual code for the method to be executed is located. Fifth, a new activation frame is created, synchronization is performed if necessary, and control is transferred to the method code.
Thanks Daniel for linking this document. I didn't really understand the run time blurb when I read it(and franky, I'm still not sure I do). But there's an example on that page and I'll paste in the explanation in case anyone else comes across this thread looking for the answer...
I've edited the method and variable names to match my question:
The occurrence of str1 before ".equals" is evaluated first, before the argument expression str1 = str2. Therefore, a reference to the string "one" is remembered as the target reference before the local variable str1 is changed to refer to the string "two". As a result, the equals method is invoked for target object "one" with argument "two", so the result of the invocation is false.