The second quarter of 2026 presented a complex landscape for US markets, marked by a robust recovery in equities and challenges for bonds amid inflation concerns and geopolitical tensions. The de-escalation of the conflict with Iran brought relief to energy prices, which had previously surged due to the crisis. Meanwhile, the Federal Reserve maintained a cautious stance on interest rates, setting the stage for a nuanced economic environment.
The S&P 500 led the charge with a remarkable 15.2% gain in the second quarter, bringing its year-to-date increase to 10.2%. This resurgence was fueled by a combination of lower energy prices and sustained investment in artificial intelligence. The technology sector emerged as the top performer, while the energy sector experienced a downturn as oil prices retreated.
The Resilience of US Equities in Q2 2026
The NASDAQ composite outpaced the S&P 500 with a 21.6% gain in the second quarter, resulting in a year-to-date increase of 13.1%. The technology sector was instrumental in this performance, with a record number of companies issuing positive earnings per share (EPS) guidance. This surge in optimism was the highest since FactSet began tracking such data.
Mid-cap and small-cap stocks also demonstrated strength. The Russell Mid-Cap ETF gained 13.8% in the quarter, bringing its year-to-date increase to 15.2%. The Russell 2000 Small-Cap ETF saw an even more impressive rise of 21.4% in the quarter, with a year-to-date gain of 22.6%. This broad-based participation across market caps indicated a more diversified market performance compared to previous years.
Internationally, equities also benefited from lower energy prices. Europe and Asia, being significant importers of oil and gas, experienced notable gains. The Korean stock market, dominated by semiconductor giants like Samsung and SK Hynix, surged 98% year-to-date. The EFA ETF, representing international developed markets, gained 8.6% during the quarter, while the EEM ETF, tracking emerging markets, rose 21.1%, bringing its year-to-date gain to 25.7%. Globally, the MSCI World Index increased by 14.2% during the quarter.
Interest Rates and the Federal Reserve’s Stance
The Federal Reserve, under the leadership of Chairman Kevin Warsh, maintained the Fed Funds rate at 3.75% during its June meeting. The Fed’s updated projections indicated a more hawkish outlook, with several members anticipating a rate hike later in the year. The two-year UST yield, currently at 4.1%, remained above the Fed Funds rate, reflecting market expectations of higher inflation.
The upward bias in inflation, driven by energy prices, has been a primary factor in the rise of two-year Treasury yields. However, inflationary pressures extended beyond energy, with home prices, rents, and electronics also seeing increases. Core PCE, a key inflation measure, has been rising for a year and is well above the Fed’s 2% target. The Fed’s priority remains fighting inflation, with Chairman Warsh emphasizing the importance of price stability.
The Bloomberg Aggregate Index, a broad measure of the US bond market, gained 0.7% for the quarter, bringing its year-to-date gain to 0.6%. The 10-year Treasury yield has fluctuated between 4.0% and 4.5% over the past two years, reflecting the market’s response to economic uncertainties.
The US Economy’s Resilience Amid Challenges
The US economy demonstrated resilience in the face of geopolitical tensions and energy shocks. Second quarter GDP growth is expected to mirror the 2.1% seen in the first quarter, supported by AI-related business investment and a surge in oil exports. The services sector continued to expand, with the ISM Services PMI averaging 54 for the quarter. The manufacturing sector also showed strength, with the ISM Manufacturing PMI averaging over 53.
Crude oil prices fell over 30% from their post-Iran peak, providing relief to consumers. However, inflation measures remain a concern, with core measures needing to come down for future rate hike expectations to dissipate. High inflation will continue to influence Fed policy for the rest of the year.
Looking ahead, the market will closely watch oil prices, inflation measures, and the mid-term elections. Despite these uncertainties, the US economy is expected to maintain its growth trajectory, supported by significant gains in corporate profitability. S&P 500 earnings expectations continue to rise, with estimates increasing by 3.4% in the second quarter, marking the largest increase since Q2 2026. Earnings are projected to grow by over 23% year-over-year, with nine of the eleven S&P 500 sectors experiencing upwardly revised earnings estimates.
As we navigate the complexities of the current economic landscape, it is crucial to stay informed and adapt to changing market conditions. The insights provided here offer a comprehensive overview of the US economy’s performance in Q2 2026, highlighting the resilience of equities and the challenges faced by bonds amid inflation and geopolitical tensions.
