Second Quarter 2026 Review and Outlook
Written by Tim Rigby
According to The Wall Street Journal, the popular stock indexes posted returns for the quarter and year to date as follows:
Quarter YearThe Dow Jones Average 12.90% 8.90%
The S&P 500 14.87% 9.60%
The NASDAQ Composite 21.41%% 12.80%%
After the difficult first quarter caused by the war with Iran and the related sharp rise in oil prices, the stock market staged a remarkable recovery in the second quarter. Much like 2025 following the tariff shock, the resilience of the American economy once again caught many investors off guard. The ceasefire agreement reached in late April, combined with easing tensions in the Strait of Hormuz and a gradual decline in oil prices from their March peaks, gave the market exactly what it needed to regain its footing.
Artificial Intelligence continues to be the dominant force driving the market. Communication services and technology companies reported earnings growth exceeding 50% year over year in many cases as the AI infrastructure buildout accelerates. Data centers are being constructed at a pace the country has never seen before. Analysts project tech firms will spend close to $700 billion on capital expenditures in 2026 alone, which is a 36% increase over last year. This could create a powerful economic multiplier across industries.
Corporate earnings for the full year are now projected to grow approximately 20% overall, the strongest pace since 2021. That level of earnings strength provides an important underpinning for stock prices even when valuations appear stretched by historical measures. The overall market appears to be broadening out beyond mega-cap technology. Value-oriented sectors and smaller companies are participating more meaningfully which is a healthy sign for the long-term sustainability of this bull market.
Inflation remains the biggest concern and is the key wildcard for the second half of the year. Core PCE, which is the Federal Reserve’s preferred inflation measure, rose 3.4% in May, well above the Fed’s 2% target. The Fed held rates steady at its June meeting with the funds rate at 3.50% to 3.75%, and markets are now pricing in rate hikes rather than the cuts many anticipated entering the year. That is a significant reversal worth watching closely, but falling oil prices could change the dialogue back to rate cuts soon.
Looking ahead to the third quarter, there is reason for both optimism and caution. The economy is growing, earnings are strong, the Iran ceasefire is holding, and consumers are benefiting from the tax changes that kicked in at the start of the year. On the other hand, persistent inflation, the Fed’s hawkish pivot, high valuations in certain sectors, and potential new tariffs when the current global tariff expire in late July all represent risks to navigate. Our overall outlook is positive, but we continue to counsel patience with new money and look for pullbacks as buying opportunities rather than chasing the market at peak levels.
Have a wonderful summer, and call with any questions or if we can help by reviewing your financial situation.
All the best,
Tim Rigby