Market Comments: Q2 2026

July 2026

The central theme of the second quarter was the U.S.-Iran conflict and the prospect of reopening the Strait of Hormuz. Though news streams were unpredictable and ever-changing, markets increasingly priced in the expectation that a resolution would ultimately emerge.

Stocks recovered nicely from a dismal start to the year. Both the Standard & Poor’s 500 Index and the NASDAQ Composite Index logged their best quarterly performance since the same period in 2020, when stocks were rallying from the initial shock of the COVID-19 pandemic.

Total returns in the second quarter for the S&P 500, the NASDAQ, and the Dow Jones Industrial Average were 15.2%, 21.6%, and 13.4%, respectively. The Russell 2000 small-cap index returned 21.6% over the period. Through mid-year, the S&P 500, the NASDAQ, the Dow and the Russell 2000 returned 10.2%, 13.1%, 9.8%, and 22.7%, respectively. Only the Russell 2000 had a positive return in the first quarter, and barely so at just 0.9%.

Strong gains in technology stocks drove the rebound, as expectations grew for increased spending on artificial intelligence. The biggest winners of the quarter were chip stocks. The PHLX Semiconductor Index advanced nearly 90% over the period, its best quarter in history.

To put into historical context the level of AI-related capital spending taking place, just four companies (Meta, Amazon, Microsoft, and Alphabet) are projected to spend the equivalent of 2.1% of U.S. gross domestic product in 2026. If those projections hold, spending as a percent of economic output would be greater than that of the railroad expansion, the build-out of the U.S. interstate highway system, and the Apollo space program.

The global economy has proven resilient in the face of uncertainty. In the U.S., expectations are for a fifth consecutive quarter of economic growth when the initial GDP estimate is released later this month. In the first quarter, contributors to the 2.1% real GDP estimate came from investment (business), government, and consumer spending, as well as exports. A surge in imports, which are a subtraction in the calculation of GDP, was the only component that weakened the results.

Though hiring fell short of expectations in June at just 57,000 new jobs added, the pace of employment gains over the first half of the year reversed the net declines of the previous six-month period. On average, the U.S. economy added 92,000 jobs per month through June. The economy shed 8,000 jobs per month over the last half of 2025. The unemployment rate declined to 4.2% in June from 4.3% the previous month. The share of the working-age population working or looking for work, known as the labor-force participation rate, was 61.5%, its lowest reading since March 2021.

Inflation spiked in May (latest data available) to 4.2% year-over-year, the highest reading since April 2023. Outside of elevated energy prices due to the Iran war, there were fewer signs of inflationary pressure. “Core” inflation, which strips out the volatile food and energy components of the consumer price index, rose 2.9%, year-over-year.

May inflation (latest available) outpaced wage gains for a second month in a row, potentially threatening the resilience of the U.S. consumer. Inflation-adjusted hourly earnings declined 0.7% over the period, after declining 0.3% through April.

As expected, interest rates were left unchanged following the June meeting of the Federal Reserve, the first under new chairman Kevin Warsh. According to quarterly projections released after the meeting, 9 of 19 members expect the Fed will raise rates at least once this year. No member expected rate increases this year when the projections were last released in March. At the post-meeting press conference, Warsh underscored that officials were “unambiguously and unanimously committed to bringing inflation down to the Fed’s 2% target.

Though the Fed made no adjustments, rates across most of the U.S. Treasury yield curve rose as investors priced in inflationary pressure and a high probability of future central bank rate hikes. The most significant increases occurred at the short end of the curve, with the 2-year Treasury climbing nearly 40 basis points (0.4%). The benchmark 10-year Treasury rose through mid-May, peaking at just below 4.7% as oil prices were reaching near-term highs. By quarter-end, as concerns around the U.S.-Iran conflict eased, the 10-year Treasury yield retreated to below 4.5%.

Uncertainty remains the prevailing theme both domestically and globally. As of the writing of this quarterly update, President Trump had declared the U.S.-Iran ceasefire over and a peace deal with Iran seemed increasingly unlikely. With earnings season around the corner and the mid-term election just four months away, investors will be looking for justification to push stocks higher given the stretched valuations already present. Summer doldrums? Perhaps not this year.

Download and print