Q2 2026 Executive Summary
Stocks staged a strong recovery in Q2, with the S&P 500 gaining +15% and finishing near record highs. The Middle East conflict and oil shock that started in Q1 continued for most of Q2, but oil prices fell as the two sides worked toward a ceasefire agreement. Meanwhile, investors’ enthusiasm for artificial intelligence (AI) stocks returned, fueling a rally in semiconductor stocks. As companies reported strong Q1 earnings, the gains broadened beyond technology to include mid-and small-cap stocks. Even as stocks rallied, market conditions continued to evolve. The spring rise in oil prices lifted inflation to a three-year high, and the Federal Reserve signaled a shift from rate cuts to rate hikes.
Market Breadth Remains Strong Beyond Tech
Beneath the headline rally in tech, Q2’s gains were broad. The S&P 500 has gained +10.2% this year, but strip out the tech sector and that falls to +5.1%, an indication of how much of the index’s return has come from a single sector. The remaining market segments in the chart produced double-digit returns, outperforming the S&P 500. The S&P 400, an index of mid-cap stocks, and international stocks have both returned approximately +17%, while the small-cap Russell 2000 has gained +22%. For most of the past few years, the stock market’s gains were concentrated in a handful of mega-cap tech stocks. Market leadership has broadened this year, creating a more balanced market.
Equity Market Recap – Broadening
Equity markets traded higher throughout the quarter, with most of the advance coming in April as stocks rebounded from their late-March lows. The strength carried into May, with the S&P 500 posting a nine-week winning streak into month end. The index set a record high in early June before giving back some ground to finish up +15.2%, its strongest quarter since Q2 2020, the early stages of the pandemic recovery. The Nasdaq gained +27.7% as tech stocks led the market rally, while the Dow rose +13.4%. As mentioned, market breadth remained strong during the quarter. Smaller companies outperformed most major indexes in Q2, with the Russell 2000 gaining +21.5%.
International markets advanced alongside U.S. stocks, with the same divide between tech stocks and the rest of the market showing up overseas. Emerging markets gained nearly +24.1%, as Asian markets like South Korea and Taiwan benefited from the same semiconductor rally as in the U.S. Developed markets gained +11.1% but trailed both emerging and U.S. stocks due to their lighter tech exposure.
Credit Recap – Bonds Trade Higher Despite Interest Rate Volatility
The bond market had another volatile quarter as interest rates tracked the path of oil. Treasury yields rose early during the quarter as oil prices remained elevated and the odds of a rate cut weakened, then reversed lower in June as energy prices declined and the inflation outlook improved. The 30-year Treasury was especially volatile, rising to its highest level since 2007 over concerns about oil, inflation, and a Fed leaning toward higher rates. Shorter-term yields, which are the most sensitive to Federal Reserve policy, also increased over the quarter as the market priced out additional rate cuts and began to weigh the possibility of a rate hike.
Warsh Rates Recap – Bond prices down / Yields Up
Rates rose across the curve and remained volatile through the quarter; towards quarter-end, markets were slightly surprised by the overall hawkish tone of new Fed Chair Kevin Warsh and began to reprice expectations for rate hikes this year with an eye on sticky inflation. For the quarter, 2-year rates rose 38bps to 4.18%; 10-year rates rose 15bps to 4.47%. The recession-watch 3M-10Y spread widened 1bp to +64; the 2Y-10Y spread compressed 23bps to +29. Rates were slightly lower to unchanged in other developed markets; the BTP-Bund spread is at 0.77%. 5-year breakeven inflation expectations fell 32bps to 2.27% (vs. recent high of 2.74% on May 4, 2026); 10-year breakeven inflation expectations fell 7bps to 2.23% (vs. recent high of 2.52 on May 4, 2026); the 10Y real yield rose 21bps to 2.23%. For 2026, markets now expect between one and two rate hikes. At yearend 2026, the market expects the Fed Funds rate to be 3.95%.
Weekly Commentary
Q2 Market Recap: Broadening Beyond AI: A Strong Quarter for Stocks
Stuart Katz
Q2 2026 Executive Summary
Stocks staged a strong recovery in Q2, with the S&P 500 gaining +15% and finishing near record highs. The Middle East conflict and oil shock that started in Q1 continued for most of Q2, but oil prices fell as the two sides worked toward a ceasefire agreement. Meanwhile, investors’ enthusiasm for artificial intelligence (AI) stocks returned, fueling a rally in semiconductor stocks. As companies reported strong Q1 earnings, the gains broadened beyond technology to include mid-and small-cap stocks. Even as stocks rallied, market conditions continued to evolve. The spring rise in oil prices lifted inflation to a three-year high, and the Federal Reserve signaled a shift from rate cuts to rate hikes.
Market Breadth Remains Strong Beyond Tech
Beneath the headline rally in tech, Q2’s gains were broad. The S&P 500 has gained +10.2% this year, but strip out the tech sector and that falls to +5.1%, an indication of how much of the index’s return has come from a single sector. The remaining market segments in the chart produced double-digit returns, outperforming the S&P 500. The S&P 400, an index of mid-cap stocks, and international stocks have both returned approximately +17%, while the small-cap Russell 2000 has gained +22%. For most of the past few years, the stock market’s gains were concentrated in a handful of mega-cap tech stocks. Market leadership has broadened this year, creating a more balanced market.
Equity Market Recap – Broadening
Equity markets traded higher throughout the quarter, with most of the advance coming in April as stocks rebounded from their late-March lows. The strength carried into May, with the S&P 500 posting a nine-week winning streak into month end. The index set a record high in early June before giving back some ground to finish up +15.2%, its strongest quarter since Q2 2020, the early stages of the pandemic recovery. The Nasdaq gained +27.7% as tech stocks led the market rally, while the Dow rose +13.4%. As mentioned, market breadth remained strong during the quarter. Smaller companies outperformed most major indexes in Q2, with the Russell 2000 gaining +21.5%.
International markets advanced alongside U.S. stocks, with the same divide between tech stocks and the rest of the market showing up overseas. Emerging markets gained nearly +24.1%, as Asian markets like South Korea and Taiwan benefited from the same semiconductor rally as in the U.S. Developed markets gained +11.1% but trailed both emerging and U.S. stocks due to their lighter tech exposure.
Credit Recap – Bonds Trade Higher Despite Interest Rate Volatility
The bond market had another volatile quarter as interest rates tracked the path of oil. Treasury yields rose early during the quarter as oil prices remained elevated and the odds of a rate cut weakened, then reversed lower in June as energy prices declined and the inflation outlook improved. The 30-year Treasury was especially volatile, rising to its highest level since 2007 over concerns about oil, inflation, and a Fed leaning toward higher rates. Shorter-term yields, which are the most sensitive to Federal Reserve policy, also increased over the quarter as the market priced out additional rate cuts and began to weigh the possibility of a rate hike.
Warsh Rates Recap – Bond prices down / Yields Up
Rates rose across the curve and remained volatile through the quarter; towards quarter-end, markets were slightly surprised by the overall hawkish tone of new Fed Chair Kevin Warsh and began to reprice expectations for rate hikes this year with an eye on sticky inflation. For the quarter, 2-year rates rose 38bps to 4.18%; 10-year rates rose 15bps to 4.47%. The recession-watch 3M-10Y spread widened 1bp to +64; the 2Y-10Y spread compressed 23bps to +29. Rates were slightly lower to unchanged in other developed markets; the BTP-Bund spread is at 0.77%. 5-year breakeven inflation expectations fell 32bps to 2.27% (vs. recent high of 2.74% on May 4, 2026); 10-year breakeven inflation expectations fell 7bps to 2.23% (vs. recent high of 2.52 on May 4, 2026); the 10Y real yield rose 21bps to 2.23%. For 2026, markets now expect between one and two rate hikes. At yearend 2026, the market expects the Fed Funds rate to be 3.95%.
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