Happy Summer! We hope this commentary finds you and your loved ones well as we enter the second half of the year. The first half of 2026 packed an entire market cycle into six months: a geopolitical shock and a painful spring selloff, followed by one of the strongest quarterly rallies in years.
First, the numbers. The S&P 500 returned 15.2% in the second quarter, its best since the second quarter of 2020, and is up 10.2% year to date. The Nasdaq Composite gained 21.6% for the quarter, the Nasdaq 100 jumped 27.7%, and the Dow Jones Industrial Average returned 13.4%.
The more meaningful story, in our view, sits further down the table. (Source: NASDAQ; percentages are in total returns as of 6/30/26) The Russell 2000 index of small-cap stocks returned 21.6% for the quarter and is now up 22.6% year to date, its best first half since 1991. The Russell MicroCap index did even better, up 26.1% and 28.0%. For the first time in years, the smallest companies led the way, and it was not close.
Readers of past letters know we have long argued that broader market participation was needed for this bull market to have longer legs. The equal-weight S&P 500 (which counts every company the same, regardless of size) is up 12.1% this year, versus 10.2% for the cap-weighted index. The average stock is beating the giants. The Magnificent Seven mega-cap technology stocks show this contrast: up 11.7% for the quarter, but down 8.8% in June alone and still down 1.7% for the year. It is the healthiest development this market has seen in years, and we welcome it.
How did we get here? Rewind to March. The closure of the Strait of Hormuz, the chokepoint for roughly 20% of the world’s oil flows, handed the global economy a genuine supply shock. Brent crude surged 94% in the first quarter, its biggest quarterly jump since 1990, then gave nearly all of it back, falling 38% in the second quarter (the steepest quarterly decline since 2020) to settle just under $73 per barrel; an interim accord signed on June 17 opened a 60-day window to negotiate a permanent truce. Stocks ran the same script in reverse: their worst quarter since 2022, then a turn in April, and they barely looked back.
Make no mistake; the spring felt far worse at the time than the current quarter-end numbers suggest. An investor who sold in late March locked in the loss and then watched the best quarter in six years unfold without them. History suggested the odds favored staying put. If we look at major geopolitical shocks of recent decades, from the first Gulf War through Russia’s invasion of Ukraine, on average, equities were higher one and two years later, and markets typically stabilized well before the conflicts were resolved. The lesson is not that shocks do not matter; it is that selling into them is, again and again, the most expensive mistake an investor can make.
The macro picture is more complicated. The oil spike left fingerprints on inflation data. The Consumer Price Index rose 4.2% over the twelve months ended May, the fastest annual pace in more than three years. Core PCE, the Fed’s preferred gauge, has drifted up to 3.4% after three consecutive months of gains. Our view is that much of the headline pressure stems from the oil shock still working its way through the pipeline; with crude back in the low $70s, that arithmetic should reverse in the second half. Core inflation at 3.4% is harder to explain away, and we are watching it closely.
The newest inflationary force comes from the same place as this quarter’s best returns: the artificial intelligence build-out. The Wall Street Journal called the data-center boom the third wave of inflation in this cycle, after tariffs and fuel. The five largest cloud companies are expected to spend roughly $741 billion on it this year, up nearly 75% from 2025. Goldman Sachs projects that data centers will drive nearly half of the growth in US power demand through 2030. The same spending that just handed the Philadelphia Semiconductor Index its best quarter on record is also a reason core inflation could prove stickier than the oil math alone suggests. The takeaway for the second half is a split screen: the headline inflation number should ease as the oil spike fades, while the piece tied to the AI build-out is the part we expect to stick.
The economy itself absorbed the shock better than almost anyone expected. First-quarter GDP was revised upward to 2.1% annualized growth, sharply up from 0.5% in the fourth quarter 2025. The labor market is sending a cooler signal: payroll growth slowed to just 57,000 jobs in June, although the unemployment rate ticked down to 4.2%.
We also want to be direct about what this rally has not fixed: affordability. Consumer prices are climbing at their fastest pace in more than three years, electricity bills are projected to rise about 6% higher each year through 2027, and hiring has slowed to a crawl. The market and the economy are not the same, and we have learned not to equate them. If that gap keeps widening, it will show up in consumer spending, and we treat that as a real risk to the second half, not a footnote.
Corporate America, meanwhile, is doing its part. Analysts now expect second-quarter earnings growth of 23.1% on revenue growth of 12.3%, and both estimates rose during the quarter, which is rare. The upward revisions have come from well beyond a handful of technology names, and that breadth of profit growth is exactly what a durable bull market requires.
That brings us to the Federal Reserve, where the biggest change of the quarter had nothing to do with rates. Kevin Warsh chaired his first FOMC meeting on June 16 and 17, and while the committee unanimously held the federal funds rate at 3.50%-3.75%, the message around the decision turned distinctly hawkish. Nine of eighteen committee participants now project at least one rate hike by year-end; in March the median still called for a cut this year. As we write, the CME FedWatch Tool puts the odds of a hike at the late-July meeting near 1 in 3, and of at least one hike by September near 70%.
So where does the Fed go from here? The old axiom says don’t fight the Fed, and we do not intend to, but we think the consensus is drawing the wrong conclusion from the new chair’s tough talk. The market fears that hikes will choke off the recovery. Our read is different on two counts. First, if headline inflation rolls over in the August and September reports as the oil round-trip works through the data, which we expect, the Fed will likely deliver less tightening than is currently priced. That would be a meaningful positive catalyst for both stocks and bonds. Second, a central bank willing to lean against inflation early is a point in favor of this expansion’s durability, not a strike against it. The expansions that ended badly were the ones where the Fed waited too long.
Ranking what matters for the second half: inflation comes first, and it is not close. The August and September prints will do more to set the market’s direction than any single Fed meeting. Within inflation, the AI build-out’s push on electricity and hardware prices is what we watch most closely because it will not unwind the way oil did. Second is the truce itself; the 60-day negotiating window closes in mid-August, and a renewed closure of the Strait is the clearest tail risk on the board. Third, we want breadth. We want small caps and the average stock to keep participating; rallies driven by a handful of names have repeatedly proven fragile. Fourth, the consumer. The affordability squeeze we flagged earlier has no policy fix and no quick reversal. If it deepens, it will show up in spending before it shows up in anything else we track. Of course, we have no crystal ball to tell us how these will resolve, but we do have a much clearer picture of the risk factors than we did in March.
Regarding our portfolios, we want to explain how a rally like this fits our investment approach. The biggest gains this year have come from a small group of semiconductor and AI-related stocks. We own some of these companies, but not at the outsized weights many indexes now assign to them, and we do not plan to. During such periods, portfolios like ours are not designed to keep pace with an index that relies heavily on the momentum of its largest holdings. Trying to match the index as it rises would mean taking on the same concentration risk when it falls, which is exactly what we aim to avoid. Investors faced similar temptations in 1999 and again in 2020. In both cases, discipline paid off, and chasing the leaders at their peaks was ultimately a mistake. That’s why we stick to our process: we remained invested through the spring decline, added to high-quality companies when prices dipped, and trimmed some of our extended winners during the June rally. If the trend of broadening mentioned earlier continues, it aligns well with our strategy. Patience is essential. Our approach is built for full market cycles, not just one market regime, and we’re committed to sticking with it.
The most important variable, though, is not the market’s allocation. It is yours. This spring was a useful stress test: if the March decline felt unbearable, that is worth a conversation about whether your investment allocation still matches your risk tolerance and goals. This is a great time to review your financial plan while the news is relatively calm.
As always, please feel free to reach out to our team so we can review your specific situation and make sure your portfolio is built for whatever the second half brings. We appreciate the opportunity to serve you and your financial needs, and we are grateful for the continued trust and confidence you have placed in us as your financial partners.
Scott A. Goginsky, CFA®
Partner, Research Analyst & Portfolio Manager
Sources: Index returns, benchmark statistics, earnings estimates, market outlook – Nasdaq, CNBC, NBC News; Oil prices & statistics – Yahoo Finance, US Energy Information Administration; Geopolitical shock history – State Street Global Advisors; Inflation, employment, economic data – The Wall Street Journal, Bureau of Labor Statistics, Bureau of Economic Analysis, Federal Reserve, Yahoo Finance, CME FedWatch.
The information set forth regarding investments was obtained from sources that we believe reliable but we do not guarantee its accuracy or completeness. Neither the information nor opinion expressed constitutes a solicitation by us of the purchase or sale of any securities. Past performance does not guarantee future results.
Second Quarter 2026 Market Commentary
Scott A. Goginsky, CFA®
Happy Summer! We hope this commentary finds you and your loved ones well as we enter the second half of the year. The first half of 2026 packed an entire market cycle into six months: a geopolitical shock and a painful spring selloff, followed by one of the strongest quarterly rallies in years.
First, the numbers. The S&P 500 returned 15.2% in the second quarter, its best since the second quarter of 2020, and is up 10.2% year to date. The Nasdaq Composite gained 21.6% for the quarter, the Nasdaq 100 jumped 27.7%, and the Dow Jones Industrial Average returned 13.4%.
The more meaningful story, in our view, sits further down the table. (Source: NASDAQ; percentages are in total returns as of 6/30/26) The Russell 2000 index of small-cap stocks returned 21.6% for the quarter and is now up 22.6% year to date, its best first half since 1991. The Russell MicroCap index did even better, up 26.1% and 28.0%. For the first time in years, the smallest companies led the way, and it was not close.
Readers of past letters know we have long argued that broader market participation was needed for this bull market to have longer legs. The equal-weight S&P 500 (which counts every company the same, regardless of size) is up 12.1% this year, versus 10.2% for the cap-weighted index. The average stock is beating the giants. The Magnificent Seven mega-cap technology stocks show this contrast: up 11.7% for the quarter, but down 8.8% in June alone and still down 1.7% for the year. It is the healthiest development this market has seen in years, and we welcome it.
How did we get here? Rewind to March. The closure of the Strait of Hormuz, the chokepoint for roughly 20% of the world’s oil flows, handed the global economy a genuine supply shock. Brent crude surged 94% in the first quarter, its biggest quarterly jump since 1990, then gave nearly all of it back, falling 38% in the second quarter (the steepest quarterly decline since 2020) to settle just under $73 per barrel; an interim accord signed on June 17 opened a 60-day window to negotiate a permanent truce. Stocks ran the same script in reverse: their worst quarter since 2022, then a turn in April, and they barely looked back.
Make no mistake; the spring felt far worse at the time than the current quarter-end numbers suggest. An investor who sold in late March locked in the loss and then watched the best quarter in six years unfold without them. History suggested the odds favored staying put. If we look at major geopolitical shocks of recent decades, from the first Gulf War through Russia’s invasion of Ukraine, on average, equities were higher one and two years later, and markets typically stabilized well before the conflicts were resolved. The lesson is not that shocks do not matter; it is that selling into them is, again and again, the most expensive mistake an investor can make.
The macro picture is more complicated. The oil spike left fingerprints on inflation data. The Consumer Price Index rose 4.2% over the twelve months ended May, the fastest annual pace in more than three years. Core PCE, the Fed’s preferred gauge, has drifted up to 3.4% after three consecutive months of gains. Our view is that much of the headline pressure stems from the oil shock still working its way through the pipeline; with crude back in the low $70s, that arithmetic should reverse in the second half. Core inflation at 3.4% is harder to explain away, and we are watching it closely.
The economy itself absorbed the shock better than almost anyone expected. First-quarter GDP was revised upward to 2.1% annualized growth, sharply up from 0.5% in the fourth quarter 2025. The labor market is sending a cooler signal: payroll growth slowed to just 57,000 jobs in June, although the unemployment rate ticked down to 4.2%.
We also want to be direct about what this rally has not fixed: affordability. Consumer prices are climbing at their fastest pace in more than three years, electricity bills are projected to rise about 6% higher each year through 2027, and hiring has slowed to a crawl. The market and the economy are not the same, and we have learned not to equate them. If that gap keeps widening, it will show up in consumer spending, and we treat that as a real risk to the second half, not a footnote.
Corporate America, meanwhile, is doing its part. Analysts now expect second-quarter earnings growth of 23.1% on revenue growth of 12.3%, and both estimates rose during the quarter, which is rare. The upward revisions have come from well beyond a handful of technology names, and that breadth of profit growth is exactly what a durable bull market requires.
That brings us to the Federal Reserve, where the biggest change of the quarter had nothing to do with rates. Kevin Warsh chaired his first FOMC meeting on June 16 and 17, and while the committee unanimously held the federal funds rate at 3.50%-3.75%, the message around the decision turned distinctly hawkish. Nine of eighteen committee participants now project at least one rate hike by year-end; in March the median still called for a cut this year. As we write, the CME FedWatch Tool puts the odds of a hike at the late-July meeting near 1 in 3, and of at least one hike by September near 70%.
So where does the Fed go from here? The old axiom says don’t fight the Fed, and we do not intend to, but we think the consensus is drawing the wrong conclusion from the new chair’s tough talk. The market fears that hikes will choke off the recovery. Our read is different on two counts. First, if headline inflation rolls over in the August and September reports as the oil round-trip works through the data, which we expect, the Fed will likely deliver less tightening than is currently priced. That would be a meaningful positive catalyst for both stocks and bonds. Second, a central bank willing to lean against inflation early is a point in favor of this expansion’s durability, not a strike against it. The expansions that ended badly were the ones where the Fed waited too long.
Regarding our portfolios, we want to explain how a rally like this fits our investment approach. The biggest gains this year have come from a small group of semiconductor and AI-related stocks. We own some of these companies, but not at the outsized weights many indexes now assign to them, and we do not plan to. During such periods, portfolios like ours are not designed to keep pace with an index that relies heavily on the momentum of its largest holdings. Trying to match the index as it rises would mean taking on the same concentration risk when it falls, which is exactly what we aim to avoid. Investors faced similar temptations in 1999 and again in 2020. In both cases, discipline paid off, and chasing the leaders at their peaks was ultimately a mistake. That’s why we stick to our process: we remained invested through the spring decline, added to high-quality companies when prices dipped, and trimmed some of our extended winners during the June rally. If the trend of broadening mentioned earlier continues, it aligns well with our strategy. Patience is essential. Our approach is built for full market cycles, not just one market regime, and we’re committed to sticking with it.
The most important variable, though, is not the market’s allocation. It is yours. This spring was a useful stress test: if the March decline felt unbearable, that is worth a conversation about whether your investment allocation still matches your risk tolerance and goals. This is a great time to review your financial plan while the news is relatively calm.
As always, please feel free to reach out to our team so we can review your specific situation and make sure your portfolio is built for whatever the second half brings. We appreciate the opportunity to serve you and your financial needs, and we are grateful for the continued trust and confidence you have placed in us as your financial partners.
Scott A. Goginsky, CFA®
Partner, Research Analyst & Portfolio Manager
Sources: Index returns, benchmark statistics, earnings estimates, market outlook – Nasdaq, CNBC, NBC News; Oil prices & statistics – Yahoo Finance, US Energy Information Administration; Geopolitical shock history – State Street Global Advisors; Inflation, employment, economic data – The Wall Street Journal, Bureau of Labor Statistics, Bureau of Economic Analysis, Federal Reserve, Yahoo Finance, CME FedWatch.
The information set forth regarding investments was obtained from sources that we believe reliable but we do not guarantee its accuracy or completeness. Neither the information nor opinion expressed constitutes a solicitation by us of the purchase or sale of any securities. Past performance does not guarantee future results.