The second quarter of 2026 was defined by another tech-driven stock market rally, increased inflationary pressure fueled largely by the Iran energy shock, and a job market that is still plowing away. Beyond the headline fears, fundamentals behind the scenes are still highly encouraging. Corporate balance sheets remain strong and earnings across S&P 500 companies are forecasted to grow at an impressive rate given how far we are in the market’s rally.
Interestingly, the strength from the Tech sector shifted from the “Magnificent Seven” to the “Picks and Shovels” trade where the market favored the perceived benefactors of the massive capital expenditure flowing to the hardware, memory chip and semiconductor companies. The top Tech firms that carried the market headlines on AI development in quarters past are now making enormous cash infusions into the firms operating behind the scenes and the market was delighted to attempt to predict the ultimate winners.
The market’s biggest challenge remains inflation as the Consumer Price Index (CPI) climbed to 4.2% in May. While the Federal Open Market Committee held interest rates steady throughout the first half of the year, the newly confirmed Fed Chair took command in May and quickly pointed out inflation has remained persistently above the 2% target for the last five years. Such observations have created expectations in the bond markets that the Fed may raise interest rates later in the year and fixed income investors stepped ahead in driving bond yields slightly higher.
The ongoing situation in Iran may continue to raise inflationary expectations as energy shocks from the closing of the Strait of Hormuz drove oil prices to spike as high as $120 per barrel. Beyond causing “pain at the pump” to begin the summer, it added to manufacturing supply chain costs for businesses as well. Energy markets and firms experienced a turbulent quarter given the commodity’s volatility in recent months.
On a bright note, the job market remains relatively resilient. Employers continued to hire (though at a slower rate), which helped the economy continue growth and consumer spending. Consumer confidence declined in the quarter despite strong equity markets and job growth as rising gas prices, continual inflation and a tumultuous geopolitical situation combined to give consumers pause.
In the second quarter of 2026, lower-quality companies outperformed those of higher-quality as markets favored speculative businesses that tend to benefit most in a riskier environment. S&P Quality Rankings are a way of grading companies (from A+ down to D) based on how consistently they have grown and maintained earnings and dividends over many years. As measured by Bank of America’s indices of the quality ranks, performance has been nearly linear year-to-date with the lowest quality (C&D) stocks up most (27.6%) and the highest quality (A+) stocks up the least (1.5%). Periods like this are a normal part of market cycles and do not mean that high-quality investing has stopped working; they simply reflect that, over short intervals, returns can be driven by shifts in risk appetite rather than fundamentals. Our focus on higher-quality companies is designed to emphasize business resilience, balance-sheet strength, and more stable return potential over full market cycles.
As we wrote last quarter, we continue to recognize that forward valuations are elevated in the equity markets, though underlying fundamentals and investor sentiment are holding on. While we may argue that
expectations for ongoing market performance may be high, there are still pockets of the market that have been neglected due to the latest Tech boom, leaving their shares at valuations that are not reflective of the strength of their capital positions and ongoing earnings prospects. It will be in these areas that we continue to search.
In the meantime, we are always available to discuss fund positioning, the markets and changes in your financial needs or goals. We remain grateful for your trust and hope that you are having an enjoyable summer.