Q2 Markets and Events

What a difference a quarter makes. After the brutal March sell-off tied to the Iran war, the second quarter of 2026 delivered one of the strongest rallies in modern market history. The S&P 500 gained roughly 15.1% in Q2 — its best quarterly return since the pandemic rebound in Q2 2020 — pushing the index to a new all-time high of 7,499 by quarter-end and lifting year-to-date returns back into positive territory at +10.1%. The Nasdaq 100 was even more dramatic, up 27.7% in the quarter for its best three-month stretch in six years.

The single biggest driver was the resolution of the Iran conflict. A ceasefire was announced on April 8, the Strait of Hormuz began reopening in mid-April, and on June 17 President Trump and Iranian leadership signed a formal Memorandum of Understanding at the Palace of Versailles — a 60-day ceasefire tied to a broader peace framework. The Senate voted on June 23 to end U.S. war operations, and by June 20 the naval blockade was fully lifted. Oil, which had spiked above $100 during the war, collapsed by roughly 20% over the quarter. (Although the peace process seems to be hitting some bumps as I write this).

The Federal Reserve also saw a leadership change. Kevin Warsh — nominated back in January — was confirmed 50-48 on May 13 and sworn in as Chair on May 22. The Fed held rates steady at 3.50% at the June 17 meeting (a unanimous 12-0 vote) but delivered a notably hawkish surprise: 9 of 19 FOMC officials now expect a rate HIKE by year-end. This is a complete reversal from the rate-cut expectations that dominated Q1.

Earnings did the heavy lifting for the rally. Q2 earnings growth for the S&P 500 came in around 23%, well above the 18.8% consensus at the start of the quarter, with 85% of companies beating estimates — a record. AI-linked names contributed roughly 60% of that growth. Nvidia briefly crossed a $5 trillion market cap in April.

Asset Classes

Almost everything went up with the exception of bitcoin, gold and oil (Exhibit 1). U.S. equities led broadly, with small caps (up 21.4%) actually outpacing large caps — a rare occurrence in this cycle. International markets kept up their strong run: developed markets rose 11.8% and emerging markets surged 21.1%. Bonds were roughly flat as the hawkish Fed pivot kept a lid on Treasury prices; the 10-year yield ended Q2 at 4.42%.

The real story on the losing side was in commodities and crypto. Gold had its worst quarter since 2013, dropping roughly 14.4% after peaking near $5,600 in late January. It had been the safe-haven trade of choice during the war; with the war over, a hawkish new Fed Chair, and the dollar hitting a 13-month high, the shine came off quickly. Oil fell 16.4% for the reasons discussed above. Bitcoin was down another 13.4% in Q2 (now off 33% year-to-date) as risk appetite rotated squarely into AI-driven equities.

Sectors and Stocks

The sector picture flipped almost perfectly from Q1 (Exhibit 2). Semiconductors were the standout by a wide margin — the SOXX semiconductor index gained an eye-popping 95% in the quarter (and is up 113% year-to-date!). Technology broadly rose 43.5%. Transports, Homebuilders, and Regional Banks all gained 15-16% as lower oil prices and improving risk appetite rewarded the more cyclical parts of the market. On the losing side, Energy went from Q1’s +38% winner to a -12.7%, Gold Miners dropped 17.8%, and defensive Utilities and Communications finished modestly lower.

At the individual stock level (Exhibit 3), the story is really about AI and semiconductors. The top five contributors by dollar change — Micron, Alphabet, AMD, Nvidia, and Apple — collectively added $3.5 trillion in market cap and drove roughly 40% of the entire index return. Micron alone was up 242% on blowout results ($23.9B in revenue up 196% year-over-year) and added $922 billion in value. On the percentage side, memory and semiconductor names dominated with stratospheric returns — Sandisk +259%, Intel +217%, AMD +186%, Dell +164%. The losers were concentrated in energy (Exxon, Chevron both down around 20%) and IT services/consulting firms (EPAM, Accenture, Cognizant all off 37-43%) where AI is increasingly being seen as a threat to the underlying business model.

International Markets

International markets were extraordinary this quarter (Exhibit 4). South Korea was up 64.1% in the quarter and is now up 108% year-to-date (!) on the back of its semiconductor and memory heavyweights (Samsung, SK Hynix). Taiwan was up 53.1% (TSMC and the broader AI supply chain), and the Netherlands rose 23.5% on ASML’s strength. Europe more broadly benefited from the war resolution — Austria, Greece, and much of peripheral Europe posted 15-20% gains.

The losers were a mix of political turmoil and commodity exposure. Indonesia fell 28% on domestic instability, China dropped 11% on continued property sector concerns, and commodity exporters like Norway (-11%) and Brazil (-9%) gave back most of their Q1 oil-driven gains. The bigger picture continues to favor international diversification — cheaper valuations, faster earnings growth, and less concentration risk than the U.S. market where the top five stocks now drive most of the returns.

Economy and Rates

The U.S. economy has proven surprisingly resilient. First quarter GDP was revised up to 2.1% (from an initial 1.6%), and the labor market has been mixed but not deteriorating meaningfully. May non-farm payrolls came in at 172,000 — a huge upside surprise versus 80,000 expected — and effectively killed the rate-cut narrative that had been building. June was softer at 57,000 with unemployment ticking up to 4.2% and labor force participation dropping to 61.5%, a five-year low. The jobs picture is decent but clearly cooling.

Inflation remains the sticky problem. May CPI came in at 4.2% year-over-year, the highest reading since April 2023, and core PCE has been stuck around 3.4%. Some of this was the residual effect of the oil spike, but services inflation is proving stubborn as well. This is what drove the hawkish Fed pivot — with growth still solid and inflation running well above target, cutting rates is difficult to justify.

Looking ahead, the setup for the second half of the year is genuinely interesting. Corporate earnings are strong, the geopolitical overhang has improved, and AI investment continues at an extraordinary pace. But valuations have expanded meaningfully, the Fed is now leaning toward hikes rather than cuts, and the market is increasingly concentrated in a handful of AI-linked names. We continue to believe that broad diversification across asset classes and geographies — including the international allocations that added so much value this quarter — is the right posture. Please reach out if you would like to discuss your portfolio.