Financial markets were dominated during the second quarter of 2026 by a dramatic reversal in many of the concerns that had pressured asset prices late in the first quarter. Investors entered the period focused on the conflict with Iran, severe disruptions to shipping through the Strait of Hormuz, rapidly rising oil prices, and the prospect that renewed inflation would keep interest rates higher for longer. As the quarter progressed, hopes for a negotiated settlement allowed energy prices to retreat sharply, easing inflation and interest-rate concerns and enabling investors to refocus on resilient economic growth and strong corporate earnings. Against this backdrop, equity markets rallied broadly. U.S. stocks, as measured by the S&P 500, gained 14.9% during the quarter, its strongest quarterly return since 2020, bringing the year-to-date gain to 9.6%. Importantly, the rally extended well beyond large U.S. companies: small-company stocks, as measured by the Russell 2000, rose more than 21% and finished their strongest first half since 1991, while emerging market stocks gained over 23% and developed international markets rose nearly 10%. Bonds generated more modest positive returns, with the Bloomberg U.S. Aggregate Bond Index gaining 0.7% and municipal bonds rising 2.5% during the quarter.
| Equity Indexes | Q2, 2026 | YTD | 2025 | 2024 | 2023 |
|---|---|---|---|---|---|
| S&P 500 | 14.9% | 9.6% | 16.4% | 23.3% | 24.2% |
| Russell 2000 (Small Cap) | 21.2% | 21.9% | 11.3% | 10.0% | 15.1% |
| MSCI EAFE (Developed) | 9.8% | 7.7% | 27.9% | 1.1% | 15.0% |
| MSCI Emerging Markets | 23.3% | 22.7% | 30.6% | 5.1% | 7.0% |
| MSCI ACWI Ex USA | 13.6% | 12.2% | 29.2% | 2.9% | 12.6% |
Note: All returns exclude dividends
| Fixed Income Indexes | Q2, 2026 | YTD | 2025 | 2024 | 2023 |
|---|---|---|---|---|---|
| Bloomberg Barclays US Agg Bond | 0.7% | 0.6% | 7.3% | 1.3% | 5.5% |
| Bloomberg Barclays Municipal Bond | 2.5% | 2.3% | 4.2% | 1.1% | 6.4% |
The second quarter also delivered one of the sharpest reversals in equity market leadership in years. During the first quarter, rising oil prices and fears of renewed inflation pushed investors toward energy, materials, and defensive businesses, while technology, consumer discretionary, and financial stocks declined. Energy outperformed technology by approximately 47 percentage points during the period. In the second quarter, that trade reversed almost completely. Expectations for a truce with Iran and lower oil prices reduced the perceived risk of a prolonged inflation shock, while accelerating investment in artificial intelligence infrastructure enabled technology to regain market leadership. Energy moved from the best-performing sector to the worst, while technology moved from near the bottom of the rankings to the top. The reversal was particularly pronounced in semiconductors and other suppliers of the physical infrastructure required to build and operate AI data centers.
One encouraging feature of the second-quarter rally was that market leadership broadened beyond the handful of large U.S. technology companies that have dominated returns in recent years. Small-company stocks and international equities both outperformed the S&P 500, while the Magnificent Seven collectively lagged the broader index. However, a closer look suggests that the rally may not be as broad as the headline indices imply. Many of the strongest-performing smaller companies were tied to artificial intelligence infrastructure, including suppliers of power, cooling, electrical equipment, and other components required for data-center construction. International markets also contain substantial exposure to the same investment cycle through companies such as Taiwan Semiconductor, Samsung Electronics, SK Hynix, ASML, and other semiconductor and electrical-infrastructure suppliers. In other words, the market has broadened beyond a small group of U.S. technology platforms, but it has not necessarily broadened beyond the artificial intelligence capital-spending boom.
Artificial intelligence remains the dominant force in financial markets today. The scale of spending on data centers, semiconductor chips, networking equipment, power generation, and related infrastructure continues to support economic activity and corporate earnings, while driving extraordinary gains in many AI-related stocks. We believe the long-term implications of this technology are significant. At the same time, enthusiasm for a powerful new technology has not historically been enough to eliminate the gravitational pull of the economic cycle.
The semiconductor industry, in particular, has always been cyclical, with periods of strong demand and limited supply eventually giving way to excess capacity, slower growth, inventory adjustments, and declining profitability. That cyclicality matters more today because semiconductor companies now represent nearly 20% of the S&P 500, compared with low-single-digit weights for much of the past three decades. In other words, investors who own a broad U.S. stock market index now have substantially more exposure to the semiconductor cycle than they may realize.
| AI-related industry | % of S&P 500 | NTM P/E |
|---|---|---|
| Hyperscalers | 16.1% | 21.6x |
| Semiconductors | 19.2% | 22.5x |
| Hardware | 10.7% | 28.3x |
| Power | 2.7% | 23.3x |
| Software | 7.5% | 21.1x |
| Total | 51.5% | , |
Source: J.P. Morgan Guide to the Markets 3Q26 dated June 30, 2026
The broader AI ecosystem has also become unusually important to the market. When we include hyperscalers such as Microsoft, Amazon, and Google, along with semiconductors, hardware, power, and software companies tied to the AI buildout, these industries now represent more than half of the S&P 500. Many of these companies are high-quality businesses with strong earnings growth, and the capital spending behind AI infrastructure may continue for longer than skeptics expect. However, the combination of rapid price appreciation, elevated valuations, and a growing share of the overall market means that the risk is no longer confined to a narrow corner of the technology sector.
Investors do not need to look far back for an example of how quickly this cycle can turn. After a period of exceptionally strong demand and performance during the pandemic, semiconductor stocks entered a significant downturn in 2022. The group declined roughly 50% from peak to trough even though semiconductor exposure in the S&P 500 was much smaller than it is today. A similar decline in a group that now represents close to 20% of the index would, by itself, reduce the S&P 500 by approximately 10%, even if every other stock in the index were unchanged. Moreover, a semiconductor downturn would probably not occur in isolation because the companies funding the AI buildout, along with suppliers of data-center equipment, power, networking, and software, are economically connected.
We are not predicting an imminent repeat of 2022. Demand for advanced chips remains strong, earnings growth has been impressive, and the AI investment cycle may persist. However, strong current fundamentals do not make the industry permanently immune from cyclicality. Periods of unusually strong demand encourage additional investment and capacity, while high expectations leave less room for disappointment if spending slows, margins compress, or the anticipated returns on AI investment take longer to materialize.
We have participated meaningfully in the strength of the AI and semiconductor themes, but as the rally has accelerated, we have been gradually reducing selected positions and redeploying the proceeds into areas where we believe the balance between risk and potential return is more attractive. For example, we have either sold or reduced position sizes in several direct and indirect beneficiaries of AI-related spending, including Cameco, Lam Research, ASML, Broadcom, and Marvell Technology. At the same time, we have added to Microsoft and Charles Schwab and established several new positions, including Molina Healthcare, ServiceNow, and CME Group. This approach may cause us to leave some money on the table if the AI rally continues. We are comfortable with that trade-off. Our objective is not to capture every final dollar of an advance, but to protect a portion of the gains already earned and reduce exposure before the cycle ultimately turns.
As always, our goal is not to predict the exact timing of market cycles, but to manage portfolios with discipline as risks and opportunities change. We remain constructive on the long-term outlook for innovation and corporate earnings, but after three and a half years of strong equity market returns, we believe this is an appropriate time to be more selective, trim areas where enthusiasm has become concentrated, and maintain flexibility to redeploy capital as better opportunities emerge.
Please do not hesitate to contact us with any questions or concerns you may have regarding your individual investment portfolio.
Your Whitney Advisor Team
Disclaimer: We recommend you review and consider any recent market news. All expressions of opinion are subject to change without notice in reaction to shifting market or other conditions. Its accuracy, completeness or reliability cannot be guaranteed. Nothing contained in this message should be construed as a recommendation.
