24 Jul Market Update: Second Quarter 2026
Market Update: Second Quarter 2026
If you read the headlines last quarter, you’d think the market should have had a rough few months. The Strait of Hormuz was in the news, oil prices spiked when the conflict with Iran escalated, and inflation numbers came in hotter than expected. Instead, stocks had their best quarter since the market bounced back from COVID. That disconnect between “scary headlines” and “strong returns” is the story of the quarter.
Or was the story of the quarter when I wrote this two weeks ago! Just 23 days into the new quarter, markets have tumbled over 1% in one day, and oil is back up over $100 a barrel. While everything I say below still stands. It is a true testament to the volatility that war can bring to our economy. We continue to monitor this situation. Below is a review of what happened last quarter.
Headline Numbers
The S&P 500 was up around 15% for the quarter, one of its strongest quarters since the market rebounded from COVID in 2020.
Zoom out to the broader global picture and the numbers tell a similar story. Global stocks overall, as measured by the MSCI index, were up about 13.5% for the quarter. International markets did well too, though not quite as well as the US.
Small company stocks were the real standout. The Russell 2000, which tracks small cap US companies, was up over 20% for the quarter, its best relative performance against the S&P 500 since the 2008 financial crisis (setting aside the initial COVID rebound). Growth stocks also outpaced value stocks by a decent margin, though as we’ll get into below, the usual handful of giant tech names weren’t the ones driving that.
Bonds were essentially flat for the quarter. Interest rates crept up because of the inflation concerns, but the Fed held rates steady.
Wait, wasn’t there a war going on?
Yes, and this is the part clients ask about most. Oil prices did spike when the Strait of Hormuz closed, but a few things kept it from turning into the kind of shock that tips the economy into recession.
First, prices never got as high as people feared. Even at their peak, oil prices adjusted for inflation were nowhere near the levels we saw in 1979-80, or even 2007-08 right before the financial crisis. There’s a real difference between “oil is expensive” and “oil is expensive enough to break the global economy,” and we never crossed that second line, even though I KNOW it feels that way when we hit the pumps.
Second, China had built up an enormous stockpile of oil in reserve, over a billion barrels, so when the war hit, the country simply drew down its reserves rather than scrambling to buy more on the open market. That took a lot of pressure off global demand right when supply was most in question. Remember Econ 101: when supply is scarce, prices go up.
Third, people around the world actually cut back on how much oil they used once prices rose. That’s not always true, sometimes demand barely budges even when prices spike, but this time consumers responded, and that also helped cap the damage.
Put together, the market looked at the situation, decided a recession wasn’t the likely outcome, and kept its eye on the thing that actually drives stock prices over time: company earnings. Those earnings estimates kept climbing right through the crisis, and that’s ultimately what carried stocks higher.
The inflation picture is more complicated
Here’s the part we’re watching most closely. Oil prices had settled to around $85 per barrel before spiking again this week. Core inflation, which strips out food and energy, is still running above the Federal Reserve’s 2% target and trending higher.
Some of that is a familiar story: government spending running well above normal, tariffs, and higher borrowing costs all pushing prices up. But there’s a newer wrinkle too. The massive buildout of AI data centers is bidding up prices for computer chips, memory, and software, and that’s starting to show up in the inflation data in a way that interest rate hikes can’t really fix. And now that every product we buy has a chip in it (does my oven really need WIFI?!), this is contributing to increasing prices across the board. The Fed can make it more expensive to buy a house. It can’t make a memory chip cheaper.
That matters because the Fed has a new chairman this year, and there’s a debate happening about which direction he’ll take things. History gives us two very different playbooks here. In 1979, Paul Volcker took over the Fed and deliberately triggered a painful recession to stamp out double digit inflation, and it worked, though it was rough medicine. In 1996, Alan Greenspan made the opposite bet: he argued the tech boom was making workers so much more productive that the economy could run hot without overheating, and he was largely right. Nobody knows yet which of those two stories we’re in this time around. The new Fed chairman just formed several committees to study the question, which tells us we’re probably looking at another six to nine months before there’s clarity on a plan.
Are stocks getting ahead of themselves?
This is the other question we hear a lot, especially after such strong returns this quarter. Are we in another dot-com style bubble?
The short answer is no, not yet. When you compare stock prices to actual company earnings, the two have moved pretty much in lock step this year. That’s very different from the late 1990s, when stock prices kept climbing while the underlying earnings went essentially nowhere. We’re not seeing that kind of disconnect in the broad market today.
Where there is excess is in how much money big tech companies are pouring into AI infrastructure, on pace for close to a trillion dollars in spending next year alone. That’s an enormous number, more than was spent building out the railroads or the electrical grid in their day. It’s a genuine risk for the companies most exposed to that spending if the AI buildout doesn’t pay off as expected. But it’s a different kind of risk than a broad market bubble, and importantly, the “Magnificent Seven” tech giants themselves are actually about as cheap, relative to the rest of the market, as they’ve been in a decade. That’s not a reason to bail on them.
An interesting twist: it’s not the usual winners
For the past couple of years, a small handful of giant tech companies drove almost all the market’s gains. This is something that makes us really nervous, and I was happy to see this quarter flip the script. Those same seven stocks actually lagged the rest of the market. The companies doing the winning instead were more old school names, hard drive and memory chip makers benefiting from the AI buildout’s appetite for hardware, and their gains were backed up by earnings growth, not just excitement.
Small and mid sized companies also had a standout quarter, their best relative to large companies since the financial crisis. And on the bond side, Corporate and mortgage-backed securities contributed higher returns thanTreasuries, as expected. This is why we diversify our bond portfolios!
This is really the theme of the quarter: diversification worked. Not just internationally, but within the US market itself. It wasn’t only the famous tech names carrying things for the first time in a while!
What about gold and Bitcoin as inflation protection?
With inflation ticking up, we get this question a lot. It also seems there’s been an uptick in the number of talking heads on social media pushing alternative investments. The data this year actually argues against it. While inflation numbers climbed, Bitcoin fell about 33% and gold dropped over 7%. In fact, gold just had one of its worst stretches of monthly returns since the 1980s. Neither asset behaved like the inflation hedge people often assume it is. That doesn’t mean there’s never a good time to own either one, but this year is a good reminder that they don’t always do what the people on Instagram tell you these assets are going to do.
The SpaceX IPO
One more notable event this quarter: SpaceX went public and raised $75 billion, by far the largest IPO in history, more than double the previous record holder. Its market cap has hovered around $2 trillion since debut, making it one of the largest companies in the world, and it looks like it may be the first of several massive AI related IPOs, with Anthropic and OpenAI both reportedly preparing to go public as well. Because of how these newly public companies get phased into market indexes, the practical impact on diversified portfolios has been modest so far, but it’s a name worth watching as more shares become tradable over the next year.
We generally advise against the purchase of an IPO in its first few months, which you can read more about here. SpaceX is down about 33%, depending on the purchase time and date.
The bottom line
Despite the ongoing war, we had a strong quarter from a market perspective: earnings kept growing, the oil shock didn’t turn into the crisis many feared, and markets outside the usual handful of tech giants got to shine. Inflation is the thing to watch, and we may be living with the “is it structural or is it temporary” debate for a while longer. But we’re not seeing warning signs of a market bubble, and the biggest risks we’re watching (an overheating Fed misstep, a sudden change in government spending, or a loss of confidence in long term bonds) all feel more like things to monitor than things happening right now.
Volatility and uncertain headlines are part of investing. They always have been. What matters more is staying diversified and staying focused on the fundamentals, and both of those held up well this quarter. Please give us a call if you would like to discuss the current markets and how they impact your investment portfolio.
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