Wealth Management Insights – Q2 2026

by Daniel Kern

Equities delivered meaningful gains in both the quarter and the first half of the year, despite the war in Iran and persistent inflation. The MSCI All Country World Index rose 15.1% in Q2, bringing its year-to-date gain to 11.5%. The S&P 500 gained 15.2%, bringing its year-to-date gain to 10.2%. Emerging markets were the standout performers during the first half of 2026, with the MSCI Emerging Markets Index rising 24%.

AI continued to be a dominant theme. Market leadership has shifted from hyperscalers to semiconductor and infrastructure companies that benefit from massive AI spending. The reach of the AI boom extended far beyond US large company stocks, with AI contributing to the outstanding performance of US small cap and emerging markets equities.

The equity rally was not without volatility. Markets navigated a hawkish pivot from the Federal Reserve in Q2, with expectations shifting from rate cuts to rate hikes despite the change in leadership from Jay Powell to Kevin Warsh. A series of blockbuster equity offerings, including the record-breaking listing of SpaceX, contributed to market volatility late in the quarter.

Information technology was the best-performing sector within the S&P 500, driven by continued AI-related capital spending, strong earnings from mega-cap tech, and valuation expansion as rate fears eased late in the quarter.

Energy stocks sunk amidst the sharp decline in crude oil prices as US-Iran peace talks advanced.

Fixed-income markets faced a challenging environment. The Bloomberg US Aggregate Bond Index returned 0.7% in Q2, bringing year-to-date performance to 0.6%. Two-year Treasury yields, which move inversely to their prices, rose 0.37% to 4.18% during the quarter. The US 10-year Treasury yield began Q2 at 4.32% and climbed as high as 4.67% in mid-May before pulling back to close the quarter at 4.46%. The mid-quarter spike in rates coincided with a surge in energy-driven inflation data and growing market speculation around Fed tightening.

Crude oil had a volatile Q2. The quarter was defined by two distinct phases: a war-driven spike followed by a prolonged selloff as supply disruption fears eased. The quarter ended with oil prices slightly above pre-conflict levels.

	Q2	YTD
Equity
MSCI All Country World Index	15.1%	11.5%
S&P 500 Index	15.2%	10.2%
NASDAQ Composite Index	21.6%	13.1%
Russell 2000 Index	21.6%	22.7%
MSCI World ex-US Index	10.4%	9.6%
MSCI Emerging Markets Index	24.1%	24.0%
Fixed Income
Bloomberg Aggregate Index	0.7%	0.6%
Bloomberg 1–5 Year Gov/Credit	0.4%	0.5%
Bloomberg Municipals	2.5%	2.3%
Bloomberg 1–3 Month T-Bill	0.9%	1.8%

Geopolitical developments

The US-Iran conflict and its impact on the Strait of Hormuz was the defining geopolitical event of the first half. Roughly one-fifth of global oil supply travels through the strait, and shipping disruptions drove energy prices sharply higher before a partial easing in late June. The flow of ships through the strait remains unsettled. The closure of the Strait of Hormuz is the latest “supply shock” for US economic growth during the past year, preceded by tariffs and the reduced labor supply due to changes in immigration policy. Commodity prices may remain somewhat above pre-conflict levels, as damage to the region’s infrastructure could take years to repair.

The US-China relationship showed signs of stabilization. China signaled willingness to accept some level of US tariffs within the framework agreed at prior negotiations and talks to extend a trade truce continued.

Growth, inflation, and Fed policy

S&P 500 revenue and earnings growth came in stronger than expected in the first-quarter results announced in April and May, with year-over-year earnings growth of more than 25% and double-digit revenue growth. Full-year 2026 earnings estimates are for high-teens growth, up from projections at the start of the year. Higher expectations may create elevated risk of disappointment in the upcoming July earnings reports.

June payrolls were weaker than expected after the surprisingly high job gains in April and May. US non-farm payrolls rose 57,000, while the unemployment rate fell to 4.2%. The fall in labor force participation to 61.5% reflects an aging population with more people leaving the workforce.

Inflation remained above central bank targets during the first half, driven in large part by the energy price shock stemming from the US-Iran conflict. It is likely that if the Strait of Hormuz reopens fully and stays open, the recent spike in inflation will be transitory.

The Federal Reserve held its benchmark rate steady throughout the first half, maintaining the target range while acknowledging heightened uncertainty. The June meeting of the Federal Open Market Committee revealed divided sentiments, with several members of the committee signaling a bias in favor of raising rates later this year. Although inflation remains persistently above the Fed’s 2% target, we expect the Fed to stay on hold rather than raise rates if long-term inflation expectations remain under control.

Artificial Intelligence

There was widening performance dispersion between perceived AI winners and losers in the first half of the year. Companies that clear AI bottlenecks, such as semiconductors, infrastructure enablers, and power suppliers, were among the best performing stocks globally. AI models require larger and faster memory systems to process increasingly complex workloads, which has made computer memory bandwidth one of the key constraints on AI performance. Consequently, memory providers are benefiting from explosive demand, propelling memory stocks to be some of the best performers globally during the first half of 2026. Asian AI-linked equities, particularly South Korean and Taiwanese stocks, were a major driver behind strong emerging market performance.

Hyperscalers faced tough questions about the return on investment from massive capital spending and concern raised about the need to raise capital to fund future spending. Application software stocks were pressured by the risk of disruption from AI, though investors made more nuanced decisions about software winners and losers during Q2. For example, companies such as cybersecurity providers, which are perceived to have a durable competitive advantage, rebounded strongly from Q1 lows. It may take time for the benefits of AI to spread more widely across the economy, so investors will need to be patient with developments that may take years rather than months to play out.

Portfolio positioning

As we enter the second half of 2026, the investment landscape remains defined by the interplay between resilient risk appetite and elevated macro and geopolitical uncertainty. Upcoming earnings results, the trajectory of the Iran conflict, and the Federal Reserve’s next policy moves will be critical variables. We remain focused on positioning portfolios to navigate this environment with appropriate diversification and risk discipline, and we look forward to discussing our specific views with you in the weeks ahead.

We advise against making any material asset allocation changes in response to market volatility, though we understand it can be tempting to try to time the market. Unless there is a change in your goals, cash needs, income, or obligations, it is prudent to stay the course with your long-term asset allocation.

Our mission is to help individuals and families meet their personal and financial goals through thoughtful planning and advice. Our personalized approach and broad range of services are designed to allow you to enjoy the present and be confident about the future. If you have questions or comments about your personal portfolio or any of the trends and strategies we’ve outlined here, please reach out to us or any member of your Nixon Peabody Trust Company team. We’re always happy to hear from you.

Daniel Kern
Chief Investment Officer
+1 617.345.1044
dkern@nixonpeabody.com