Quarterly Market Update: 2026 Q3

Market Summary

After one of the most turbulent quarters in recent memory, markets staged a powerful comeback in the second quarter of 2026. The Iran conflict that rattled stocks and bonds in Q1 began to recede as a ceasefire took hold and oil prices retreated from their $128 per barrel peak back toward $70. Technology stocks led the rally, snapping back sharply as investors refocused on the artificial intelligence spending cycle. By June 30, the S&P 500 had climbed approximately 15% for the quarter alone, pushing year-to-date gains solidly into positive territory.

The Q2 rebound was both swift and broad. Of the eleven S&P 500 sectors, nine posted double-digit gains for the quarter. Technology was the clear standout, surging over 31% in Q2 alone, more than erasing its Q1 losses. Financials, industrials, and consumer discretionary each gained between 9% and 15%. The one notable exception was energy, which gave back 13% as crude oil cooled from its conflict-driven highs. For the first half of the year, energy is still up nearly 20%, and industrials and technology are each up roughly the same. Bonds, while offering little excitement, have returned a modest positive as yields moved somewhat higher but income from coupons provided a cushion.

The AI Investment Cycle: Why Markets Looked Past the Headlines

When markets fell sharply in Q1, one of the undercurrents was skepticism about the sustainability of artificial intelligence spending. Were the enormous capital investments being made by Amazon, Alphabet, Meta, Microsoft, and others actually going to generate returns? Q2 provided a provisional answer, at least from the market’s perspective: yes, for now.

The numbers are striking. The major AI hyperscalers are on track to spend an estimated $758 billion on AI-related capital expenditure in 2026, up from $416 billion in 2025 and $131 billion just three years ago. That spending is flowing through to earnings in several adjacent industries. AI-related sectors, such as hyperscalers, semiconductors, hardware, power infrastructure, and software, now represent more than 51% of the S&P 500’s market capitalization. Technology earnings are expected to grow nearly 40% this year.

A few things worth keeping in mind as you interpret this:

The AI story is real, but the timeline is long. Businesses are adopting AI at a meaningful pace, with 42% of firms in finance and 38% in education now reporting that they use AI in some business function. But the economic returns from this technology will take years to fully materialize. Markets are pricing in a lot of optimism. That’s not a reason to avoid the market, but it is a reason to stay diversified rather than concentrating your portfolio in any single theme.

The Magnificent 7 are no longer carrying the market alone. Through the first half of 2026, the seven largest technology companies collectively returned 0%, while the other 493 companies in the S&P 500 returned approximately 15%. Broader market participation is generally a healthy sign, suggesting the rally has a more durable foundation than when a handful of names drove everything.

Valuations are elevated but not at bubble extremes. The S&P 500’s forward price-to-earnings ratio stands at 20.4x, above the 30-year average of 17.2x. At the peak of the dot-com bubble, that ratio hit 25x. We are not there. But we’re not cheap either. At current valuations, history suggests future 5-year returns are likely to be more modest than the exceptional gains of recent years.

Inflation Hasn’t Gone Away

The recovery in equity markets in Q2 was welcome, but one important piece of the economic picture has gotten more complicated: inflation is moving in the wrong direction again.

Headline CPI came in at 4.2% in May 2026, up from 3.8% in April and the highest reading in over a year. Core CPI — which excludes food and energy — remains more contained at 2.9%, but even that remains above the Federal Reserve’s 2% target. The culprits are familiar: energy costs, even after retreating from their Q1 highs, remain elevated relative to a year ago; services inflation is sticky; and tariffs continue to put upward pressure on goods prices. (The effective tariff rate on U.S. imports currently sits at roughly 11%, down sharply from its April 2025 peak of 30% but still meaningfully above pre-2025 levels.)

The Federal Reserve’s own June 2026 projections tell the story plainly. The Fed now expects headline PCE inflation to end 2026 at 3.6% — well above its 2% target. That’s not the picture the central bank or investors were hoping to see at this point in the year. As a result, the Fed has held rates steady and markets are currently pricing only modest rate cuts in the second half of 2026.

What this means for investors:

The dollar has strengthened modestly, up about 3% year-to-date. That has been a headwind for international equities and could weigh on U.S. corporate earnings in sectors with high overseas sales exposure.

Bonds are earning their keep again, but remain constrained. The Bloomberg U.S. Aggregate Bond yield is now 4.73%, the highest in over a decade. Current income from bonds is meaningful. However, with inflation running near or above that yield in headline terms, the real (inflation-adjusted) return on bonds is thin. Shorter-duration and inflation-protected bonds deserve consideration for investors who are particularly sensitive to purchasing power risk.

The Fed is not coming to the rescue. For much of 2023–2025, investors could count on the Fed gradually cutting rates, which provided a tailwind for both stocks and bonds. That tailwind is much less certain today. With inflation re-accelerating and fiscal deficits remaining large, the path to lower rates is narrow. Net interest on the federal debt is now over $1 trillion annually — a figure that itself puts upward pressure on long-term borrowing costs.

A Mid-Year Moment: Check In on Your Financial Plan

With the calendar now past the halfway point, July is a natural time to step back from market headlines and take stock of where you stand financially. A brief mid-year review doesn’t need to be complicated — a few focused questions can tell you a lot.

Are you on track with the basics?

• Have contributions to your 401(k), IRA, or other retirement accounts kept pace with your intentions for the year? If you’ve fallen behind, there’s still time to catch up. The majority of employer-sponsored plans now offer Roth options. Have you taken advantage of this tax-free growth option?
• Has inflation pushed your spending noticeably higher in any category — groceries, utilities, healthcare, travel? If so, it may be worth revisiting your monthly budget to make sure withdrawals or savings targets still reflect reality.
• Are your emergency reserves still adequate? A general guideline is three to six months of living expenses in liquid savings. In a higher-rate environment, that cash is actually earning something now.

Get ahead of open enrollment season.

Many employers begin open enrollment for benefits in October or November, which can feel like it sneaks up quickly. A few things worth thinking through now rather than at the last minute:

• Is your health insurance coverage still the right fit, or have your medical needs changed since you last enrolled?
• If your employer offers an HSA-eligible plan, are you taking full advantage of the contribution limit and the triple tax benefit?
• When did you last review your beneficiary designations on your retirement accounts and life insurance? These don’t update automatically after life changes like marriage, divorce, or the birth of a grandchild.

If any of these prompt questions about your specific situation, this is exactly the kind of conversation we’re here for. Reach out and we’ll take a look together.

Looking Forward

As we move deeper into 2026, the investment landscape looked meaningfully better through most of the second quarter, but recent developments have added a new layer of uncertainty. The Iran conflict, which appeared to be de-escalating after the spring ceasefire signals, has re-intensified over the past week, and oil prices have begun climbing again as a result. It is too early to know whether this represents a temporary flare-up or a renewed escalation that could push energy costs back toward Q1 highs — but it is a reminder that the geopolitical risks we flagged earlier this year have not gone away.

At the same time, the easy part of the recovery may be behind us. Inflation is proving stubborn, the Fed is in a holding pattern, and equity valuations leave less room for error than they did a year ago. Consumer sentiment, while possibly a contrarian positive, is a reminder that many Americans are feeling real economic strain, particularly lower-income households who spend a disproportionate share of income on energy and food.

What doesn’t change in this environment is the approach we believe works best: stay diversified across asset classes and geographies, keep costs low, align your portfolio with your actual time horizon, and resist the temptation to make large tactical bets based on near-term headlines. History consistently rewards that discipline.

As always, please don’t hesitate to reach out if you have questions about your specific situation or if something in this update prompts a conversation worth having. That is exactly what we are here for.

1. Forward P/E ratio is the most recent S&P 500 index price divided by consensus analyst estimates for earnings in the next 12 months, provided by IBES since March 1994 and FactSet since January 2022. Shiller’s P/E uses trailing 10-years of inflation-adjusted earnings as reported by companies. Dividend yield is calculated as consensus estimates of dividends in the next 12 months, provided by FactSet, divided by the most recent S&P 500 index price. EY minus Baa yield is the forward earnings yield (the inverse of the forward P/E ratio) minus the Bloomberg U.S. corporate Baa yield since December 2008 and interpolated using the Moody’s Baa seasoned corporate bond yield for values beforehand. ↩︎