Q2 2026 Quarterly Commentary

The U.S. economy carried solid momentum into the second quarter. The final estimate for Q1 2026 GDP growth came in at 2.1% annualized, consistent with a healthy, non-recessionary expansion. Going into the second half, the Atlanta Fed GDPNow model was tracking Q2 growth at approximately 3.3%, suggesting the economy continued to expand at an above-trend pace despite the turbulence in global energy markets.

The defining story of the quarter was the conflict in the Middle East. The escalation involving Iran triggered what the International Energy Agency called the largest energy supply disruption in the history of the global oil market. The partial closure of the Strait of Hormuz, which handles roughly 20% of global oil trade and 20% of global liquefied natural gas exports, sent Brent crude toward $112 per barrel in April. The direct effect on U.S. consumers showed up quickly: the March CPI report showed energy prices up 12.5% year-over-year, and by May, headline CPI had surged to 4.2%, the highest reading since April 2023. Core CPI, which strips out food and energy, remained more contained at 2.9% year-over-year in May.

Energy prices are highly volatile but represent a relatively small share of U.S. consumer spending: gasoline and energy goods account for roughly 2% of personal consumption. The U.S. is also a net exporter of oil, which limits the broader economic damage. The bigger concern is the second-order effect on inflation expectations and Federal Reserve policy, and that is exactly where the complication developed this quarter.

Entering April, markets were pricing in two Federal Reserve rate cuts for 2026. By the June 17 FOMC meeting, those expectations had been completely repriced. The Fed held the federal funds rate at 3.50–3.75%, and the updated Summary of Economic Projections, the first to incorporate Iran-related impacts, showed a median year-end rate forecast of 3.8%, with nine of nineteen committee members projecting at least one rate hike before year end. The FOMC statement removed language that had signaled a bias toward cuts and reaffirmed its intent to “deliver price stability.” This was Chair Warsh’s first meeting, and the tone under his leadership is notably less accommodating than markets had anticipated.

Treasury yields reflected the shift. The 10-year yield started Q2 near 4.31% and ended June 30 at 4.44%, a rise of roughly 13 basis points. With the Fed signaling it may need to raise rates rather than cut them, we will keep a close eye on the yield curve. Rising yields push bond prices lower, the mechanism that kept fixed income returns modest even as coupon income continued to accumulate.

The second quarter delivered historic results. After the S&P 500 fell 4.2% in Q1, the index surged approximately 15.2% in Q2, its best quarterly performance since Q2 2020. The S&P 500 crossed 7,600 for the first time during the quarter. The recovery was swift and powered by the forces that have driven markets for two years: artificial intelligence, corporate earnings growth, and the continued buildout of AI infrastructure.

Within the U.S. market, the leadership picture was bifurcated. AI-related technology, semiconductors, and cloud infrastructure drove the strongest gains early in the quarter, following the Iran ceasefire announcement in early April and the resulting stabilization of energy prices. The Magnificent 7, which had a decline of −11% in Q1, rebounded sharply. The ten largest companies in the S&P 500 have an outsized effect on index returns, and their recovery accounted for a disproportionate share of Q2’s performance. The quarter ended, however, with a notable rotation. In June, as large technology stocks pulled back, the Nasdaq 100 fell roughly 3.78% from its June 5 high and the Magnificent 7 declined about 7.2%; defensive sectors including Consumer Staples, Real Estate, and Healthcare led the market. That rotation is a healthy sign. When markets broaden beyond a narrow group of leaders, the advance tends to be more durable.

Corporate earnings provided a strong fundamental foundation for the rally. Valuations for U.S. large-cap equities remain elevated relative to historical averages, though no longer at the extreme levels seen in late 2025. The earnings growth rate will need to sustain to justify current prices.

International developed markets delivered positive returns through Q2, with the MSCI EAFE Index continuing the outperformance trend that began in early 2026. European banks and value-oriented sectors were standout performers, benefiting from improving data in Europe and Japan and a weaker U.S. dollar. The shift toward international outperformance reinforces the case for geographic diversification, particularly after a decade in which U.S. equities dominated global returns.

The number worth focusing on is the current yield level. At around 5%, investors in high-quality bonds are locking in a level of income that was simply not available through most of the previous decade. For clients who were frustrated by near-zero yields for much of the 2010s and then experienced price losses as rates rose, the current level represents a meaningful reset. The income is real, and the forward-looking return potential for fixed income is substantially better today than it was three or five years ago.

For many clients, Q2 2026 felt like whiplash. The quarter opened with oil prices surging, inflation at a four-year high, and fears of a widening conflict in the Middle East. Portfolios that had just come through Q1’s pullback faced another wave of headline risk before the recovery set in. Yet by quarter-end, equities had delivered their strongest quarterly return in six years, bond income continued to accumulate, and international markets added further diversification benefits. In conversations with clients, performance often exceeded their fears. A diversified, balanced portfolio, across U.S. equities, international equities, and investment-grade bonds, absorbed the early volatility and participated meaningfully in the recovery.

The Iran conflict, the repricing of Federal Reserve expectations, and the sharp rotation within equities in June: none were surprises in the sense that we predicted the specific events, but we expected events like these to come. That expectation shapes how we invest across both stocks and bonds, and how we build the financial plan around the portfolio. The planning we do together is designed to help clients stay invested in this kind of environment.

We remain focused on the consistent implementation of the long-term plan we have built for clients, including rebalancing and adjusting portfolios as opportunities arise. If you are not a client and have not stress-tested your portfolio, or do not have a well-designed plan to navigate uncertain times, perhaps now is the time to do so. We stand ready and available to assist you.

Let’s keep moving forward, together.