Q2 2026 Market Recap

• +15.2%U.S. equity total return in Q2
• 85%of S&P 500 companies beat Q1 estimates, by ~17% in aggregate
• $126 → $80soil's round trip from the war peak after the framework agreement

The second quarter picked up largely where Q1 left off — under the shadow of the war in Iran and an oil market that had spiked toward $120 a barrel. What unfolded from there was, in a word, a recovery. Markets sniffed out the tentative resolution about a week early and spent April and May climbing back, the conflict continued toward an off-ramp in June, and the S&P 500 set fresh all-time highs before a hawkish first meeting from the new Fed chair pulled some of it back in the closing days.

April brought a sharp, semiconductor-led rebound off the March 30 lows. The drawdown that felt so painful in Q1 — roughly 9% peak-to-trough, right in line with what we typically see in the fourth year of a bull market — proved to be the kind of reset that earnings can grow into. And grow they did: with first-quarter results in the books, about 85% of S&P 500 companies beat estimates and did so by an aggregate of nearly 17% — well ahead of the five-year norms on both counts. That earnings growth has outpaced price appreciation, resulting in multiple contraction across several areas of the market. The advance broadened and then accelerated through May, which finished up better than 5% and stretched the index’s winning streak to nine straight weeks before taking a breather in the first week of June.

The war finds an off-ramp

The war narrative shifted markedly in mid-June when the United States and Iran signed a framework agreement to end the war and reopen the Strait of Hormuz. Oil, which had touched roughly $126 a barrel at the height of the conflict, fell to the low $80s on the news — its lowest level since the first days of the war, about a third below the peak, though still some 7% above where it started the year. The pullback in oil will likely prove to be a positive, as it may be a drag on inflation figures and help pull inflation back below wage growth — a plus for consumers. The reopening has been anything but instantaneous, but the direction of travel on energy, and therefore on the single biggest macro variable of the past two quarters, has largely turned for the better.

Inflation: mostly an energy story

The most obvious result of the spike in oil prices has been a reacceleration in inflation. Headline CPI for May came in at 4.2% year-over-year, a three-year high, even as core CPI — which strips out food and energy — held at a more contained 2.9% and actually eased month-over-month. That gap is much of the story: the bulk of this year’s inflation has been a supply-driven energy shock rather than broad-based demand pressure. If the Strait of Hormuz reopens and crude keeps drifting back toward pre-war levels, the most acute source of upward pressure on prices should begin to fade. We will be watching the next several CPI and PCE prints closely for confirmation.

The quarter in numbers

Asset class total returns (%)

Asset class	Q2 ‘26	YTD 2026
Emerging market equity	24.1	24.0
US equity	15.2	10.2
Foreign developed equity	11.1	9.8
Fixed income	0.7	0.6
Commodities	-11.4	24.1

S&P 500 sector total returns (%)

Sector	Q2 ‘26	YTD 2026
Info tech	31.8	19.8
Industrials	14.9	20.2
Cons discretionary	9.3	-0.8
Financials	9.0	-1.2
Healthcare	8.8	3.5
Real estate	8.5	11.5
Comm services	8.3	0.8
Materials	2.0	12.0
Cons staples	0.3	8.0
Utilities	-0.5	7.7
Energy	-13.4	19.7

Total returns via Morningstar Direct and FactSet Financial Data and Analytics; asset classes and sectors represented by S&P, MSCI, and Bloomberg indices (full index definitions in the PDF). All valuation metrics per FactSet.

A hawkish debut at the Fed

Amidst this backdrop, we got Kevin Warsh’s first meeting as Fed Chair on June 17, which, in short, delivered a surprisingly hawkish tone. The committee held the funds rate unchanged at 3.50–3.75% by a unanimous vote, accompanied by a markedly shorter statement that dropped the forward-guidance language that had leaned toward easing. The statement focused exclusively on the price-stability side of the dual mandate, omitting maximum employment — a clear signal the Fed is focused on fighting inflation while the labor market continues to prove resilient. The dot plot, which as recently as March still penciled in a cut for 2026, flipped to signal that the next move is more likely a hike, with nine of eighteen participants projecting at least one increase. Officials raised their 2026 inflation forecast meaningfully and trimmed their growth estimate. The immediate aftermath was more negative than positive in markets: equities sold off and the 10-year Treasury, which had been hovering near 4.3%, jumped as yields moved higher. Pricing has shifted considerably from the two-to-three cuts expected coming into the year toward the possibility of a hike before it ends.

International: the Pacific leads

Outside the U.S., the standout remained the strength of international equities — and within that, the leadership of the Pacific over Europe. Korea and Japan have been the clearest beneficiaries of the AI capital-spending cycle working through the memory and semiconductor supply chain, and it has shown up directly in returns. Europe’s earlier gains, which leaned on the war-driven energy and defense trade, faded as the conflict wound down. We continue to think the valuation gap between international and U.S. equities is wide enough — and the earnings growth comparable enough — to justify a meaningful allocation abroad, a view we express in our International strategy (ETF: INTL).

A regime shift rewards the builders

We are seeing markets price in an ongoing regime shift. The era of zero rates and ever-deeper globalization rewarded asset-light businesses; the next era — higher-for-longer rates, reshoring, and an AI build-out that is fundamentally physical — rewards the companies that build, make, move, and power. The AI story is not a software story alone. It runs through chips, data centers, the electrical grid, and the raw materials that go into all of it, and the dispersion between the winners and losers is wide. That is the case for active selection, and it informs the overweights in our Sector Rotation strategy (ETF: SECT) toward materials, industrials, energy, and utilities, the secular exposures in our Thematic strategy (ETF: TMAT), and the role our BuyWrite strategy (ETF: BUYW) plays as a more defensive, income-oriented complement to equity beta.

The setup from here

Stepping back, the setup is healthier than the headlines suggest. The S&P 500’s forward multiple compressed to about 19x at the end of the first quarter and has since recovered only partway, to roughly 20x, even as forward earnings estimates have risen. Full-year 2026 S&P 500 earnings growth is now tracking around 25%, up from less than 16% at the start of the year, with margins at record highs. Prices have gone up, but earnings have gone up alongside them.

As always, there are risks out there: the fate of the Strait of Hormuz remains cloudy, inflation has risen back to multi-year highs, and the Fed has made it clear it is focused on inflation, which could push rates higher. The leadup to midterm elections has also historically been a choppier period for markets as they sort out the winners and losers ahead of election day. As always, we would remind investors that time in the market is what matters most, not timing it. We hope you and your loved ones are healthy and safe, and please let us know if we can answer any questions.