Second Quarter 2026 Market Insights Report
The second quarter of 2026 delivered the strongest quarter for global equities since 2020, powered by a historic semiconductor boom, easing geopolitical risk, and a sharp rebound in earnings. The following is a recap of the equity markets.
Equity Markets
The S&P 500 returned 15.2% and posted its best quarter in six years, with results driven by AI infrastructure demand and broad earnings strength. Earnings growth also remained robust during the quarter.
The Nasdaq Composite returned 21.6%, marking its best quarterly result since 2020. The index was led by the semiconductor sector, driven by the continued robust outlook for AI. Stocks such as Micron, Intel, and AMD led the way.
The Dow Jones Industrial Average returned 13.4% for the quarter, with Alphabet's addition to the index helping boost performance.
The Russell 2000 returned 21.5% for the quarter. This was a sign that market breadth has improved and that the market is no longer focused solely on the Magnificent Seven.
A U.S.–Iran memorandum of understanding reduced the war premium in oil and lowered market volatility, with Brent crude falling sharply toward $73 per barrel and WTI trading below $70 per barrel.
Beyond the earnings rebound, the market also benefited from fiscal tailwinds. Tax refunds and tariff reimbursements boosted household and business cash flow, providing additional support for economic activity.
Risks We Continue to Monitor
We continue to monitor several risks. Inflation remains one of the primary concerns, as May CPI reached 4.2% year over year, driven largely by higher energy prices.
We also acknowledge that the market continues to exhibit relatively narrow leadership within the large-cap segment, driven primarily by a handful of mega-cap AI companies, including Alphabet, Amazon, Meta, Micron, and Nvidia. These companies accounted for much of the earnings growth during the quarter. At the same time, the technology sector has begun experiencing some negative sentiment as investors question the lofty valuations of many of its largest companies.
Looking Ahead to the Third Quarter
As we enter the third quarter, we note:
Breadth improvement, particularly among small-cap stocks, suggests a healthier overall market structure.
Earnings will carry much of the burden going forward, and we believe July earnings guidance will be critical given elevated valuations.
Geopolitical risk remains, as the Iran agreement is a memorandum rather than a final settlement.
The AI capital expenditure cycle remains real, but it is extremely concentrated, and we believe increased volatility is likely.
Fixed Income Markets
The second quarter of 2026 was one of the most volatile periods for global fixed income since 2022. Government bond yields rose sharply following geopolitical shocks, credit spreads widened from historically tight levels, and investors demanded greater compensation for inflation and supply risk.
U.S. Treasury yields increased as the Iran conflict pushed energy prices higher, reviving inflation concerns. Short-term yields climbed more than long-term yields, reflecting expectations for a more hawkish central bank policy.
Government bond yields also increased globally, although the magnitude varied by region depending on inflation exposure. The Middle East conflict drove the sharpest yield increases in economies with inflation-focused mandates.
Investment-grade corporate bond spreads widened from cycle lows as record primary issuance reached approximately $640 billion, representing a 19% increase from the prior year.
The U.S. Economy
As we think about the broader economy during the second quarter, we saw a mixed but resilient U.S. economic picture. Growth remained positive, inflation reaccelerated due to energy shocks, hiring strengthened later in the quarter, and geopolitical developments influenced nearly every major macroeconomic trend.
Overall, the U.S. economy in the second quarter stayed sturdy under pressure, supported by solid consumer spending, improving hiring, and strong AI-driven investment, which helped offset the drag from elevated energy prices and geopolitical uncertainty.
GDP Growth
Real GDP growth for the second quarter is estimated at approximately 2.1%, slightly below earlier forecasts but still solid.
First-quarter GDP grew 1.6%, driven by consumer spending and investment, with that momentum carrying into the second quarter.
Labor Market
The labor market generally remained constructive. Unemployment held near 4.3%–4.4%, demonstrating stability despite softer hiring earlier in the year.
Job gains strengthened during the second quarter, led by leisure and hospitality, local government, health care, and construction. Overall, employers maintained a "no fire" stance, helping support household income.
Inflation and Federal Reserve Policy
Inflation, as measured by the Consumer Price Index (CPI), rose to 4.2% year over year in May, the highest reading since April 2023. The increase was driven almost entirely by higher energy prices following the Iran conflict.
Importantly, Core CPI remained relatively stable, suggesting inflation pressures were not broad-based.
The Federal Reserve held interest rates steady under new Chair Kevin Warsh. However, projections became more hawkish because of inflation concerns, and we believe the market priced in approximately 40 basis points of additional rate hikes before year-end.
Geopolitical Developments
The macroeconomic environment during the second quarter was shaped largely by the Iran conflict and the resulting increase in energy prices. The conflict disrupted oil infrastructure and pushed gasoline prices sharply higher.
Later in the quarter, a U.S.–Iran memorandum eased tensions and allowed the partial reopening of the Strait of Hormuz, reducing the geopolitical risk premium. Oil and gasoline prices began falling late in the quarter, setting up the potential for inflation relief during the third quarter.
Fiscal Support
We believe meaningful fiscal tailwinds also supported the economy.
Households received larger-than-normal tax refunds through the One Big Beautiful Bill Act (OBBBA), while businesses received tariff reimbursements following a Supreme Court ruling. Together, these measures boosted cash flow and helped cushion the effects of higher inflation.
Business Investment and Housing
The AI investment boom and broader business investment remained strong but highly concentrated in AI-related industries. Outside of AI, capital expenditures softened, although improving ISM surveys suggest a broader recovery could develop if geopolitical risks continue to ease.
The housing market remained under pressure as mortgage rates climbed back above 6.5%, reversing earlier declines. Home sales stayed depressed, and construction activity softened as builder margins tightened. However, limited housing supply continued to keep home prices relatively stable despite weaker demand.
Third Quarter Outlook
Our outlook for the third quarter begins with the view that inflation likely peaked in May as energy prices declined following the U.S.–Iran memorandum
Consumer spending remains the backbone of economic growth, supported by tax refunds and stable employment.
We believe AI investment will continue to anchor business spending, although broader capital expenditures will depend on geopolitical stability.
Our expectation is that the Federal Reserve will remain on hold for now. However, its increasingly hawkish projections suggest additional rate hikes remain possible if inflation stays elevated.
Finally, while the housing market remains soft, we do not view it as a systemic risk given the continued constraints on housing supply.
Disclaimer: Investment advisory services offered through Innovative Asset Advisors Group, LLC (“IAAG”), a Registered Investment Advisor with the U.S. Securities and Exchange Commission. Registration does not imply any level of skill or training. The content provided is for informational purposes only and does not constitute investment, legal, or tax advice. Investments, including equities, bonds, commodities, real estate, and alternative assets, carry risks, including the potential loss of principal. Past performance is not indicative of future results. Before making any financial decisions, you should consult with your personal financial, legal, or tax advisor to evaluate your individual circumstances. IAAG does not guarantee the accuracy, completeness, or timeliness of the information presented, and it may be subject to change without notice. This material, or any portion thereof, may not be reprinted, sold, or redistributed without the written consent of Innovative Asset Advisors Group, LLC.
