INTRODUCTION
The second quarter of 2026 delivered one of the strongest equity rallies of the century. The S&P 500 gained 15.2%, its best quarter since Q2 2020, and the Nasdaq Composite advanced 27.7% as the U.S.-Iran conflict moved toward resolution and enthusiasm for artificial intelligence returned in force. The rally began narrowly, led by semiconductors, but broadened meaningfully by quarter-end; the Russell 2000 gained 21.5%, and small-cap, equal-weight, and value benchmarks all reached record highs. The quarter also brought a change in Federal Reserve leadership, with Kevin Warsh confirmed as Chair in May and immediately establishing a hawkish, inflation-focused tone, while oil fell 31.4% to pre-conflict levels as the Strait of Hormuz reopened.
Figure 1 — Q2 2026 Asset Class Performance. Equities staged a historic recovery from the Q1 selloff while gold corrected sharply and oil normalized to pre-conflict levels.
MACRO ENVIRONMENT
Inflation accelerated during the quarter as the first quarter's energy shock passed through to consumer prices. April CPI rose 3.8% year-over-year and May reached 4.2%, the first reading above 4% in three years, with energy accounting for more than 60% of the monthly increase. Growth remained resilient despite the price pressure: the Atlanta Fed's GDPNow estimate tracked at 3.3%, first-quarter productivity rose 2.8% against unit labor cost growth of just 1.8%, and consumer spending held firm. The labor market cooled at the margin, with June private payrolls rising 98,000 against expectations for 110,000, but layoffs showed no meaningful increase.
The quarter's most consequential development was the change in Federal Reserve leadership. Kevin Warsh was confirmed on May 13 and sworn in on May 22, succeeding Jerome Powell. At his first FOMC meeting on June 17, the committee held rates at 3.50% to 3.75%, and Warsh struck a distinctly hawkish tone, refocusing the institution on its 2% inflation mandate. The 2-year Treasury yield jumped 16 basis points on the announcement, the largest Fed-day move since March 2008. Rate cuts are fully priced out for 2026; markets now assign roughly 65% probability to a hike by September. The Strait of Hormuz reopened late in the quarter, sending oil down 10% to $69.50 per barrel and easing near-term inflation pressure.
ASSET CLASS REVIEW
Domestic Equities
The S&P 500 gained 15.2%, the Nasdaq Composite rose 27.7%, and the S&P 500 surpassed 7,600 for the first time. Semiconductors defined the quarter: the Philadelphia Semiconductor Index surged 87.8%, its best quarterly performance since 1994 inception, driven by AI memory demand and datacenter capital spending. Technology gained 31.8% as the only sector to outperform the broad index; small caps rebounded decisively with the Russell 2000 up 21.5%. Earnings underpinned the advance, with Q2 growth estimates rising from 18.8% to 23.3% during the quarter and projected revenue growth of 12.2% marking the strongest since Q2 2022. Concentration remains the caveat: 38% of S&P 500 members declined in the first half, 17 of the 20 best performers came from information technology, and late-June profit-taking trimmed peak gains. The index trades at roughly 20x forward earnings.
International Equities
International markets participated fully in the rally, with the MSCI EAFE Index gaining 11% and international stocks up approximately 17% year-to-date, extending their 2025 outperformance. The quarter produced one of the widest geographic performance gaps on record: South Korean and Taiwanese equities surged on the semiconductor boom while China and India lagged significantly. Much of the outperformance is concentrated in the same AI themes driving U.S. markets, though valuations outside the U.S. remain at meaningful discounts and currency effects were largely neutral as the dollar stabilized.
Fixed Income
Government bond yields rose to multi-decade highs around the world. The 10-year Treasury climbed to 4.57% in mid-May before settling near 4.48% as the Hormuz reopening sparked a late rally. The moves abroad were more historic: Japanese 10-year JGBs reached 2.70%, last seen in May 1997; German bunds touched 3.14%, the highest since May 2011; and UK gilts hit 5.15%, last seen in June 2008. The Bloomberg U.S. Aggregate returned +1.1% as income offset rate volatility, and credit spreads widened modestly late in the quarter. With real yields elevated and breakevens below post-COVID averages, inflation-protected Treasuries offer inexpensive protection against persistent inflation drivers.
Figure 2 — Global 10-Year Government Bond Yields, June 30, 2026. Sovereign yields reached levels last seen decades ago as inflation pressure and hawkish central bank policy repriced global rate expectations.
Alternatives
Precious metals corrected sharply after their historic advance. Gold fell 14.3%, its worst quarter in twelve years, ending at $4,008 per ounce; silver fell more than 50% from recent highs, and gold and Bitcoin stand as the two worst-performing major asset classes year-to-date. The structural case for hard assets remains intact given fiscal dynamics and central bank accumulation, but speculative excess has been flushed. Oil fell 31.4% to $69.50 as supply normalized. Private markets showed renewed vitality: SpaceX's public debut has energized the venture ecosystem, and prospective mega-IPOs from Anthropic and OpenAI could return significant capital to private market investors in coming quarters.