Strong Second Quarter, AI Divergence, and a K-Shaped Economy Shaping the Current Outlook
Markets closed out the second quarter of 2026 with notable strength as major indices recovered from the market bottom reached on March 30, 2026, following the outbreak of the Iran conflict at the end of February (Source: CNBC). This recovery may be, in part, a benefactor of timing surrounding the March low, as various asset classes were positioned to recover across April, May, and June.
Semiconductor stocks rose rapidly and now account for nearly 20% of the total value of the S&P 500 as of July 8, 2026, a level that compares to roughly 9% at the peak of the technology bubble in the early 2000s (Source: US500). At the same time, the performance of the broader technology sector shows a significant divide: a broad semiconductor index has risen approximately 61% year-to-date, while a software-focused index has declined roughly 13% over the same period (Source: CNBC). This divergence is a reminder that broad sector labels can obscure meaningful differences in performance, and that thoughtful portfolio construction matters even within areas of the market that carry a single label.
Beyond technology, the second quarter also reinforced the recovery of small-cap and mid-cap stocks, which recorded their best first half since 1991 (Source: CNBC). In addition, international equities, emerging markets, and the equally-weighted S&P 500 have all outperformed the market-cap-weighted S&P 500 year-to-date, a meaningful reversal after a decade during which that index proved difficult to beat (Source: Yahoo Finance). Value-oriented strategies have also contributed, with the Russell 1000 Value Index up approximately 16% year-to-date compared to roughly 2% for the Russell 1000 Growth Index (Source: Yahoo Finance). That broadening of participation is constructive and suggests that the strength of this market cycle may be becoming more widely shared.
On the geopolitical front, the Iran ceasefire that had briefly reduced tensions came to an end on July 8, 2026, as hostilities resumed following new naval incidents in the Strait of Hormuz (Source: CBS News). Oil prices, which had retreated from highs near $120 per barrel to the mid-$60s range during the ceasefire period, began rising again as the agreement ended (Source: TradingView). Pre-conflict WTI crude oil was priced at approximately $67 per barrel, and prices were hovering in the mid-$70s as of July 8, 2026 (Source: TradingView). While the equity market response has been muted, with the S&P 500 down approximately 0.3% on the day of the renewed escalation, oil and energy prices remain a factor worth watching as their effects work their way through consumer spending and inflation data. We believe that the muted market response was due to the fact that neither Iran nor the U.S. desire a protracted conflict. We expect negotiations to resume shortly.
Across the broader consumer economy, auto loan and personal loan delinquencies have reached levels not seen since the 2008-09 financial crisis, even as equity markets have posted strong results (Source: Federal Reserve). This divergence reflects a K-shaped economy in which different segments of the population are experiencing very different economic conditions. Cumulative inflation, which has remained elevated even as the annual rate has moderated, continues to weigh on many households.
Looking ahead, key economic data releases are scheduled for mid-July, including the Consumer Price Index, the Personal Consumption Expenditures index, and retail sales figures. These reports may offer important signals on whether inflationary pressures are easing and whether consumer activity remains resilient. We expect the Federal Reserve will be watching closely, and markets are likely to react to any surprises in either direction. As inflation remains stubborn through the AI buildout, 9 out of 18 Fed officials now expect a rate hike by December, 2026.
In this environment, the principles of long-term investing remain relevant. Diversification, disciplined rebalancing, and resisting the urge to make emotionally-driven decisions are the foundation of a strategy designed to participate in long-term growth while managing concentration risk.
Important Disclosures:
- This commentary is for informational purposes only and should not be construed as investment advice or a recommendation to buy or sell any security.
- Forward-looking statements are based on current market conditions and are subject to risks and uncertainties. Actual results may differ materially.
- Past performance does not guarantee future results. All investments involve risk, including possible loss of principal.