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Key Takeaways, Second Quarter 2026

During the quarter, higher oil prices’ impact on capital markets seemed transitory as prices declined towards pre-war levels. Geopolitics receded as investors’ attention switched to AI, economics, earnings growth, and rising interest rates. Corporations reported strong earnings. Consumers continued to spend. Inflation and unemployment data were mixed.

The broad US stock market rose 15% supported by robust earnings reports. Tech led (as well as other stocks expected to benefit from AI). IT stocks rose 33%. Energy stocks fell 11%.

At Warsh’s first meeting as Chair, the Federal Reserve left the Federal Funds rate unchanged. They signaled a more hawkish outlook, focusing on persistent inflation pressures and a resilient labor market. The consensus is that there will be one rate increase later this year. The interest rate on the 10-year Treasury rose 15 bps to 4.47%.

Equities

With a tailwind from earnings reports and expected earnings growth, the broad US market gained 15.4%. Performance was a reversal of the first quarter: the overall market rose, Tech stocks gained 33%, Energy lost 11%.
The US stock market is up 11% YTD; 23% for the last year.
Without the support of Tech stocks, Developed International stocks lagged, rising only 11%. With a larger proportion of growth names and supported by strong earnings, Emerging Market stocks gained 24%.
For year-to-date and 1-year horizons, US and Developed International had similar returns. Emerging Markets led, gaining 24% year-to-date and 44% for 1 year.
Growth stocks modestly outperformed Value (17% to 14%), but they still lag year-to-date and for 1 year. Growth stocks were the winner for longer periods.
Small caps led Large and for the trailing 12 months, but still lag for longer periods.

Fixed Income

Core bonds gained 70 bps in Q2 as the impact of narrower spreads was offset by higher risk-free rates. Core bonds are up 60 bps year-to-date, and 3.8% for the last 12 months.
The Fed held the Fed Funds rate unchanged. The Dot-Plot suggests that there will be 1 rate increase before year-end.
At the short-end, the yield on 1-year Treasuries rose 17 bps in Q2. The yield of 5-year Treasuries rose 19 bps, and the 10-year and 20-year yields rose 12 bps and 9 bps respectively.
Over the last 12 months, Treasury yields were down at the short end. The 1-year was down 35 bps. The yield of the 5-year Treasury rose 27 bps, and the 10-year 14 bps. Rates changed little at the long-end. 20-year rates rose 5 bps, and 30-year 3 bps.
Credit spreads fell. Investment Grade Corporate by 14 bps, and High Yield by 47 bps. For the last 12 months they narrowed by 10 bps and 20 bps.