2026 | 2nd Quarter
2026 Second Quarter Market Commentary
Heading into the third quarter, the NBA season has wrapped up, the World Cup is in the knockout stage, and the United States is commemorating its semiquincentennial. As Americans celebrate 250 years of independence, for New York Knicks and U.S. soccer fans, the wait to celebrate their team’s success may have felt just as long. Looking at the markets, the S&P 500 index posted its best quarter in six years, up 15.2% in Q2, bringing year-to-date returns to 10.2%. This is a repeat performance from last year with a dismal first quarter followed by a double-digit performance in the second quarter.
Over the past few years, markets have been dominated by the Artificial Intelligence (AI) theme, with a handful of names in the Technology sector driving market performance. While we expected earnings growth and market returns to broaden as the AI buildout took place, we did not predict the speed or extent that this broadening would take. As large hyperscalers continue to spend on AI data centers, demand for memory chips and semiconductors far outpaced supply. While the Tech sector once again drove performance, up over 30% for the quarter, smaller names in the index including Micron, Advanced Micro Devices, Applied Materials, and SanDisk saw triple-digit returns in the quarter, joining the leaderboard as some of the largest contributors to the S&P’s performance.
The Industrials sector continued to benefit from the AI buildout, up almost 15% for the quarter. In reversals from the first quarter, Financials rebounded from software-related private credit fears, while expectations for a resolution in the U.S.-Iran conflict led to lower oil prices, kicking the Energy sector (down 13.5%) to the bottom of the leaderboard. Overall, 9 of the 11 S&P 500 sectors had positive returns for the quarter, as the difference between Value (up 13.7%) and Growth (up 16.7%) was much tighter than we’ve seen recently.
Double-digit returns were a recurring theme for the quarter. Mid Cap stocks saw strong performance (up 14.5%) driven by the usual AI suspects (Technology and Industrials), while Small Cap returns (up 19.7%) were boosted by those same two sectors, as well as Health Care, Financials, and Consumer Discretionary stocks.
While U.S. performance in recent years has been concentrated, it pales in comparison to what Emerging Markets stocks (up 24.1%) exhibited in the second quarter. Just three names, SK Hynix, Taiwan Semiconductor, and Samsung Electronics, all recipients of increased spending on memory chips and semiconductors, accounted for two-thirds of the quarterly performance and over three-quarters of year-to-date (up 23.9%) performance. Tech names are a much smaller part of the MSCI EAFE Index (International Developed stocks) but still account for over 40% of its 10.8% quarterly return. European Financials also contributed, benefiting from a lighter regulatory environment and higher net interest margins.
Early in the quarter, prior to a cease-fire agreement between the U.S. and Iran, gas prices rose above $4.50/gallon. This drove inflation higher, leading to higher interest rates, with the 10-Year Treasury yield rising slightly to 4.44%. The small decline in bond prices (prices fall as yields rise) only partially offset the income generated by bonds, with the Bloomberg Aggregate Bond Index up 0.7% for Q2. Investment Grade Bonds (up 1.4%) and High Yield Bonds (up 2.5%) fared better, as strong equity returns and abating concerns in Private Credit helped credit spreads tighten.
May saw a changing of the guard at the Federal Reserve, with Kevin Warsh sworn in as new Fed Chair, replacing Jerome Powell. While no major changes to policy were made at his first press conference in June, Chairman Warsh did announce the creation of five task forces that will look at the central bank’s core operations, including communications, the balance sheet, existing data sources, productivity and jobs, and the Fed’s inflation frameworks. One can expect less communication from the Fed going forward, as Warsh looks for the Fed to respond to what it sees in the economy and the markets, and not the markets responding to what they’re hearing from the Fed.
As inflation rose throughout the quarter, markets went from expecting at least one interest rate cut by the Federal Reserve in 2026 to at least one rate hike. But inflation likely peaked in May and should moderate throughout the second half of the year on lower gas prices. Job growth was strong in the second quarter, but the labor market is not in danger of overheating. The unemployment rate should come down as labor supply declines due to an aging population and reduced immigration. Corporate profits for the S&P 500 are expected to grow over 20% this year, on the back of strong revenues and record-high profit margins. Chairman Warsh acknowledged at the June press conference that while current monetary policy is restrictive in certain parts of the economy like housing, it is not in other parts, such as the financial markets. Given this backdrop, it is plausible to see the Fed hold interest rates at current levels this year, reducing them slightly in 2027 as inflation heads towards its 2% target.
In 2020, during the depths of the COVID-19 pandemic, a familiar refrain heard was “the economy is not the stock market”. While the U.S. economy shrank 3.5% as economic disruptions reduced consumer and business spending, companies exposed to the work-from-home theme, e-commerce, and cloud computing helped the S&P 500 surge 18%. Six years later, this phrase does not carry the same weight. Business fixed investment (capital expenditures or capex) represents 13% of U.S. economic output but accounted for two-thirds of economic growth in Q1 and almost half of economic growth since 2024. The massive amount spent by hyperscalers on the AI buildout has also driven earnings, profit margins, and stock returns. While this has increased shareholder wealth, it has also increased concentration risk in portfolios, and any slowdown in AI-related spending could impact the economy and the stock market.
In the strong-link/weak-link framework (a model for evaluating systems based on how value is created), strong-link systems are driven by their best performer, while weak-link systems can see one bad component ruin everything. Basketball is considered a strong-link sport, where one star player can deliver a championship. Soccer is a weak-link sport, specifically on defense, where one error by an under-performer can determine the outcome of a game. Our investment philosophy sits somewhere between the two. We would want a starting lineup with Jordan, LeBron, Magic, Wilt, and Kobe. Yet even the greatest basketball team needs role players. Likewise, portfolios should benefit from great companies without becoming overly dependent on any one investment through diversification. And the Fixed Income teammates provide stability, income, as well as a solid defense if a star player goes down.
Periods like the first half of this year are a reminder that markets rarely move in a straight line. While short-term headlines can be unsettling, successful investing is built on discipline, diversification, and maintaining a long-term perspective. Our role is not to predict every market move, but to help clients stay focused on a thoughtful investment strategy designed to meet their personal goals. As we celebrate America's 250th year, we're reminded that long-term success—whether in a nation or an investment portfolio—is built through patience, resilience, and the ability to adapt. We appreciate the trust you place in our team and look forward to helping you reach your financial goals for many years to come. We wish you and your family a safe, relaxing, and enjoyable summer, pursuing your own happiness.
As always, please reach out to us with any questions.
Jonathan F. Kolle, CFA®
President, Chief Investment Officer
Timothy J. DeAngelo, CFA®
Portfolio Manager
Shawn R. Keane, CFP®
Vice-President
Cindy de Sainte Maresville, CFP®
Certified Financial Planner
Rusty Giles
Director of Marketing
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