Q2 2026 Market Review: A Historic Rebound, an Uneasy Peace, and a New Regime at the Fed

Three months ago, we closed our first quarter review with a case for patience. The S&P 500 had just posted its worst start to a year since 2022, oil had surged from $67 to nearly $100 a barrel, and the Strait of Hormuz, the chokepoint through which roughly one fifth of the world's oil transits, was closed. We argued then that the quarter's losses were concentrated, that diversification was working, and that valuation compression is the mechanism through which future returns rebuild.

The second quarter delivered the rebuild faster than almost anyone expected. The S&P 500 returned 15.2% and the Nasdaq surged 21.4%, the largest quarterly gains for both indexes since the second quarter of 2020. The Dow rose 12.9%, its strongest quarter since late 2022, and closed the period at a record 52,319. The Russell 2000 returned 21.5%, capping the best first half for small caps since 1991. An investor who capitulated in the depths of the March selloff missed one of the strongest quarters in a generation.

Two forces drove the recovery. The first was diplomacy. A halting, frequently interrupted series of ceasefires between the United States and Iran culminated in a memorandum of understanding signed on June 17, reopening the Strait of Hormuz and sending oil prices down roughly 30% for the quarter, the largest quarterly decline in crude since 2020. The energy tax that defined the first quarter began to refund itself in the second.

The second was earnings. First quarter S&P 500 results, reported during April and May, showed earnings growth of roughly 29% on revenue growth of nearly 12%, the fastest in years, led by semiconductor and AI infrastructure companies. The Philadelphia Semiconductor Index posted the best quarter in its history. Whatever one's view of AI capital spending, the profits underneath it were real, and they arrived precisely when the market needed a reason to look past the war.

Beneath the celebratory quarter-end headlines, however, the picture is more complicated. Inflation has climbed to its highest level in more than three years. A new Federal Reserve chairman, Kevin Warsh, used his first meeting to signal a genuine possibility of rate hikes. The peace with Iran remains a framework, not a treaty, and it was tested by renewed exchanges of fire in the final days of June. The quarter ended well; it did not end settled.

Sources: YCharts; Bloomberg; S&P Dow Jones Indices LLC; MSCI Inc.; Russell/FTSE; ICE; Bloomberg Index Services Limited. Index returns reflect total return in USD through the June 30, 2026 market close unless noted. MSCI returns are net total return. ETF data (UUP, GLD) reflects fund net asset value performance and is not directly equivalent to the underlying index. Bitcoin figures based on a spot price of $60,159.63 on June 30, 2026 versus $66,699.27 on March 31, 2026 and $88,414.63 on December 31, 2025. Past performance is not indicative of future results.

The bond market told a quieter story that masked considerable drama. The 10-year Treasury yield ended the quarter near 4.4%, essentially where it began, but the round trip in between was violent: yields climbed to nearly 4.6% by mid-May, with the 30-year briefly touching its highest level since 2007 above 5%, as inflation data surprised to the upside and rate-hike expectations built. Yields then retreated in late June as oil collapsed back toward pre-war levels. Core bonds returned 0.7% for the quarter and stand modestly positive for the year, high yield municipals lead the fixed income table at 4.1% year to date, and cash has added 1.8% through six months.

The second quarter's rally was broad, with every major equity category posting double-digit gains. But the composition of the quarter, and the year-to-date leadership it confirmed, was anything but the familiar playbook. Nearly every trade that dominated 2024 and 2025 sits at the bottom of the 2026 table, and nearly everything investors had written off sits at the top.

Sectors told the story of a quarter that inverted its predecessor. Energy, the first quarter's runaway winner with a gain of more than 30%, stalled as oil prices collapsed; the sector's earnings power remains elevated, but the momentum trade ended abruptly. Technology, the worst-hit large sector in the first quarter, staged the most powerful recovery: semiconductor indexes posted the best quarter in their history, with the AI memory complex leading. Micron has gained roughly 248% year to date and SanDisk far more, as AI workloads consume an ever-larger share of global high-end memory production. Financials and industrials participated in the recovery, while defensive sectors that sheltered investors in March, including utilities and consumer staples, lagged the rebound.

Size and geography both favored the overlooked. In the quarter itself, small caps beat large caps by more than six percentage points and emerging markets beat the S&P 500 by nearly nine. Through six months, those gaps widen to roughly 12 and 14 points respectively. Market breadth, the perennial complaint of the 2023 to 2025 bull market, has improved markedly: leadership has expanded well beyond the handful of mega-cap names that defined the prior three years, even as the Nasdaq's June pullback showed how quickly sentiment toward the largest technology companies can turn.

We wrote in April that everything in the outlook flowed from a single question: whether and when the Strait of Hormuz reopens. The second quarter answered that question the way diplomacy usually does, which is to say slowly, partially, and with repeated reversals. We continue to acknowledge, first and foremost, that this is a human conflict whose consequences extend well beyond capital markets.

For markets, the direction of travel mattered more than the setbacks. Iran reports shipping more than 40 million barrels of oil since the blockade lifted, Russian exports have surged to record levels, and analysts now warn of a looming supply glut rather than a shortage. WTI crude ended the quarter near $70 per barrel, down roughly 30% for the quarter, the steepest quarterly decline since 2020, and remarkably only about 5% above where it started the year. The energy shock that dominated the first quarter has, for now, fully round-tripped.

The risks have not disappeared; they have changed shape. Iranian officials insist they will impose transit fees once the 60-day MOU window expires in mid-August, and the nuclear questions the MOU deferred remain unresolved. The market variable to watch has shifted from whether tankers can move to what the strait's traffic will cost, and whether the Doha process can convert a ceasefire into something durable.

The most consequential development of the quarter for long-term investors may not have been the ceasefire. It may have been the changing of the guard at the Federal Reserve. Jerome Powell's term as chairman expired in mid-May, and Kevin Warsh, a former Fed governor and longtime critic of the institution's communication practices, took the helm. In an unusual twist, Powell remains on the Board of Governors, where he voted with the majority at Warsh's first meeting.

That meeting, held June 16 and 17, kept the federal funds rate unchanged at 3.50% to 3.75% for a fourth consecutive time; the last cut came in December 2025. The decision was unanimous and widely expected. Everything around it was not. The post-meeting statement shrank to roughly 130 words from more than 300, dropped the easing-leaning forward guidance entirely, and Warsh declined to submit his own rate projection, announcing instead five internal task forces to re-examine how the Fed communicates, what data it uses, and how it evaluates inflation. He has promised, in his own words, regime change.

The substance was more striking than the style. The June dot plot showed nine of eighteen participating policymakers supporting higher rates by year-end, six of them penciling in two quarter-point increases. Eight supported holding, and only one projected a cut. In March, no policymaker had projected a hike and the median called for one cut. Markets responded accordingly: futures now price at least one rate increase by the end of 2026, and Minneapolis Fed President Neel Kashkari publicly backed a hike in late June. The question that framed the past two years, when will the Fed cut, has been replaced by a different one entirely: will the Fed hike?

The quarter also delivered an institutional verdict of lasting importance. On June 29, the Supreme Court ruled 5 to 4 that the President cannot, for now, remove Federal Reserve Governor Lisa Cook, with Chief Justice Roberts writing that the Fed's independence was designed by Congress and that any change must come from Congress, not the courts. The ruling is procedural and the underlying case continues, but the market read it as a meaningful affirmation of central bank independence at a moment when that independence is under unprecedented political pressure. Equities rallied on the final two sessions of the quarter with the ruling as part of the backdrop.

The Fed's dilemma remains the one we described in April, now under new management. An energy-driven inflation spike is fading with oil prices, but the spike lifted headline inflation to multi-year highs, core measures have drifted upward, and the labor market has reaccelerated. Hiking into a supply shock that is already reversing risks unnecessary damage; ignoring an inflation rate above 4% risks the credibility Warsh has staked his chairmanship on restoring. His answer so far is deliberate silence: no forward guidance, no personal dot, and a promise to react to the data as it arrives.

Growth proved sturdier than feared. First quarter GDP, released April 30, showed the economy expanding at a 2.0% annualized rate, later revised to 2.1%, a clear acceleration from the fourth quarter's 0.5%, which itself was revised sharply lower from initial readings. Investment, exports, consumer spending, and government spending all contributed; the AI data center buildout continued to add measurably to growth. The Atlanta Fed's GDPNow model tracked the second quarter at roughly 2.5% as June closed. The recession that forecasters assigned meaningful odds to in April has not arrived, and the probability estimates have receded with oil prices.

The labor market broke out of its slump. After February's conflict-driven loss of 156,000 jobs, payrolls rebounded emphatically: 214,000 in March, 179,000 in April, and 172,000 in May, the strongest three-month advance in more than two years. The May report beat the consensus estimate by more than double. Unemployment held at 4.3% for a third consecutive month, wage growth ran a moderate 3.4% year over year, and job openings ticked up to 7.59 million in the final JOLTS report of the quarter. Whatever the war did to sentiment, it did not stop American hiring.

Inflation is the price of the resilience. Headline CPI reached 4.2% year over year in May, the highest in more than three years, driven overwhelmingly by the energy passthrough that began in March. The Fed's preferred gauge told the same story: headline PCE inflation hit 4.1% in May, the highest since April 2023, with core PCE at 3.4% and drifting upward. The more encouraging detail sits beneath the headlines: core CPI rose just 0.2% month over month in May, and with crude now back near $70, the mechanical energy contribution to headline inflation should fade materially over the second half. Time will tell whether May marked the near-term peak, and the open question, the one that will decide whether the Fed hikes, is how much of the energy spike leaked into broader prices, including through tariffs, before it reversed.

One further development deserves note for its long tail: the Supreme Court's February ruling that certain tariffs imposed under the International Emergency Economic Powers Act were unlawful continued to work through the economy in the second quarter, with the government obligated to refund affected businesses. Several companies, including Nike, have already reported margin benefits from expected tariff refunds. The fiscal and pricing effects of that unwinding will remain a variable through the second half.

The second half opens with two dominant variables rather than one: whether the Doha process converts the MOU into a durable settlement, and whether the Federal Reserve's next move is a hike. Everything else, including equity valuations that have re-expanded after a 15% quarter, flows from those two answers.

Each quarter we test the key inputs to our 10-year capital market assumptions, the 2026 to 2035 framework Vistamark's investment leadership has published in successive form since 2003, against current conditions. The second quarter moved the needle in the opposite direction from the first.

Equity valuations: richer again. Our assumptions start from an S&P 500 valuation of 25.5 times earnings, in the 96th percentile of history since 1957. That starting point is the primary reason our ten-year U.S. large cap forecast sits at 5.39% annualized, well below the index's 10.4% long-run average, and it is why the forecast hierarchy tilts toward the cheaper corners of the market: emerging markets at 6.70%, developed international at 6.28%, small cap at 5.78%, and mid cap at 5.64%. The first quarter's selloff had modestly improved the large cap math; the second quarter's 15% rally took it back. Strong earnings growth is doing real work in support of prices, but investors should not confuse a great quarter for markets with an improvement in the decade-ahead return outlook for U.S. large cap. If anything, the first half strengthened the case for the small cap, value, and non-U.S. allocations our assumptions favor, and those markets led it.

Bond yields: still constructive. Our 4.27% ten-year forecast for core bonds is anchored to the yield of the Bloomberg US Aggregate, a relationship that has explained roughly 90% of the index's subsequent ten-year returns historically. With the Aggregate's yield in a similar neighborhood today and the 10-year Treasury near 4.4%, that forecast remains intact, and forward fixed income return expectations remain meaningfully better than anything available during the zero-rate era. A Fed that defends its inflation target, even at the cost of near-term discomfort, is ultimately good news for bond investors' long-run real returns.

Inflation: the swing factor. Our ten-year inflation assumption of 2.23% is derived from the breakeven rate between nominal Treasuries and TIPS, which is to say it is the bond market's own forecast. The energy shock lifted realized inflation well above that rate, but market-based expectations have behaved: with oil back near $70, long-run breakevens suggest investors still view the spike as an event rather than a regime. Whether that confidence survives the Fed's next few decisions is, in our view, the single most important input to watch before our next annual CMA update.