After a turbulent start to the year, U.S. equity markets staged a powerful recovery in the second quarter of 2026, propelled by a de-escalation of the U.S.-Iran conflict, a sharp reversal in crude oil prices back to pre-war levels, and accelerating corporate earnings growth. The S&P 500 Index1 returned 14.9% during the quarter, its best quarterly performance since the second quarter of 2020, more than recouping its first-quarter losses and setting new record highs. The Nasdaq Composite Index2 surged 21.4% as semiconductor and memory-chip stocks soared on robust AI capital expenditures; the Philadelphia Semiconductor Index recorded its best quarterly performance (+87.8%) since its 1994 inception.
Beneath the headline strength, market leadership evolved over the course of the quarter. The initial rally off the March lows was driven by large-cap growth and hyperscalers, but by quarter’s end the advance had broadened, with small-cap, micro-cap, equal-weight, and value benchmarks all reaching new record highs. The S&P 500 Equal Weight Index3 trailed the cap-weighted index during the growth-led rebound, posting a Q2 return of +10.9%. However, the index nonetheless finished the quarter at record levels, generating a year-to-date performance (+11.1%) that bested its cap-weighted counterpart (+9.6%). The “Magnificent Seven”4 participated in the rally but as a group
continued to trail the broader index year to date, with wide dispersion among constituents. In a reversal of the first quarter’s historic style divergence, growth reclaimed leadership: the Russell 1000 Growth Index5 returned 16.6%, versus 13.4% for the Russell 1000 Value Index6, though value outperformed in June as investors rotated into more cyclical and defensive areas of the market.
In late March, the Russell 2000 Index7 benchmark was still trading marginally below its prior cycle highs from November 2021. The small cap benchmark surged by 21.2% in Q2 2026, however, finally breaking out to fresh record territory. Ten of eleven small-cap sectors finished higher, and even after the rally, small-cap stocks continue to trade at a meaningful discount to large-cap indices despite an improving earnings growth outlook.
International markets also delivered strong returns, though developed markets trailed the U.S. rebound, with the MSCI World ex USA Index8 advancing 9.3% for the quarter. Emerging markets were the clear standout: the MSCI Emerging Markets Index9 surged 23.3%, driven overwhelmingly by the AI-linked semiconductor complex in North Asia. Korea and Taiwan — home to Samsung Electronics, SK Hynix, and TSMC, the critical suppliers of high-bandwidth memory and advanced logic chips — led global markets, with Taiwan and South Korea both moving to roughly $5 trillion in equity-market capitalization and overtaking India in global market-cap rankings. Dispersion was extreme, however, as exemplified by the MSCI China Index falling by 7.6% in Q2 2026 compared to an 87.4% quarterly increase in the MSCI Korea Index.
The most consequential development of the quarter came on the monetary policy front, where the Federal Reserve underwent its first leadership change in eight years. Kevin Warsh was confirmed by the Senate on May 13 and sworn in as Chair on May 22, succeeding Jerome Powell, who remains on the Board of Governors. The Federal Open Market Committee (FOMC) left the federal funds rate unchanged at 3.50%-3.75% at both its April and June meetings, but the June 17 meeting — Warsh’s first as Chair — marked a decisive hawkish shift: the Committee released a dramatically shortened statement that dispensed with forward guidance, and the updated Summary of Economic Projections showed the median 2026 fed funds projection rising to 3.8% from 3.4% in March, implying at least one rate hike this year. The inflation backdrop justified the caution, with May headline Consumer Price Index (CPI) at 4.2% year over year and core Personal Consumption Expenditure (PCE) rising for a third consecutive month to 3.4%. By quarter’s end, markets that had entered 2026 expecting two to three rate cuts were instead pricing a roughly 80% probability of a quarter-point hike by the September meeting.
The 2-year U.S. Treasury yield rose 35 basis points to end the quarter at 4.14% as markets priced out rate cuts, while the 10-year yield rose a more modest 16 basis points to 4.46%, its ascent contained by the collapse in oil prices. The flattening drove the 10-year/2-year spread to its narrowest level since March 2025. The iShares Core U.S. Aggregate Bond ETF (AGG)10 eked out a gain of approximately 0.7%, as coupon income again offset price pressure. Credit was the clear winner: spreads held near historically tight levels, and the iShares Broad USD High Yield Corporate Bond ETF (USHY)11 returned approximately 2.5%.
Crude oil largely reversed its first-quarter shock. After surging in Q1 and peaking above $126 per barrel in April, Brent crude fell roughly 20% in May and continued lower in June, as fears of a sustained supply disruption eased and the U.S. and Iran moved toward a negotiated end to the conflict. The temporary reopening of the Strait of Hormuz restored Persian Gulf export flows, and successive OPEC+ production increases completed the normalization, with Brent ending the quarter in the low $70s per barrel — down approximately 38% for the quarter and roughly back near pre-war levels, though still positive year to date. The energy sector, the market’s best performer in Q1, was the biggest laggard in Q2 as the geopolitical risk premium unwound.
Precious metals bore the brunt of the hawkish policy repricing. Gold fell approximately 13% during the quarter to end near $4,000 per ounce, its worst quarterly performance since 2013, with nearly 12% of the decline occurring in June alone. Rising real yields, a firmer U.S. dollar following the June FOMC, and the unwinding of war-related safe-haven demand all weighed on the metal after it touched an all-time high near $5,595 per ounce in late January. Silver fared worse, ending the quarter near $59 per ounce, down approximately 20%, hit by both the precious metals liquidation and the late-June technology selloff. Notably, central-bank gold accumulation continued through the correction.
As we enter the third quarter of 2026, the market narrative has rotated once again — away from geopolitical risk and energy-driven inflation, and toward the durability of the AI-led earnings cycle and the policy intentions of a new Federal Reserve Chair. On one hand, the fundamental backdrop is strong: S&P 500 earnings are expected to grow more than 20% year over year for a second consecutive quarter, market breadth has improved markedly, and economic growth remains above trend. On the other hand, valuations now sit above long-term averages, signs of speculative excess have emerged in pockets of the market, inflation remains well above target with the Fed now more likely to hike than cut, and the Middle East ceasefire and diplomatic process remain works in progress. In our view, this environment continues to argue for diversification, disciplined risk management, and selectivity across both equity and fixed income allocations — with particular attention to valuation discipline in the market’s most crowded themes.
