Recent Markets: Q2 2026
The second quarter saw stocks surge to record highs and surprising economic resilience despite significant volatility, the ongoing war in Iran and “sticky” inflation. The DOW ended the quarter over 52,000 (a new record) and broad markets, both domestic and foreign, gained solid double-digit returns.
Year-to-date, equity markets are positive, led by foreign stocks, U.S. small stocks, and U.S. value stocks. On a 12-month basis, foreign stocks (excluding Europe) are up roughly 30%, U.S. small-cap stocks are up 40%, and U.S. value stocks rose approximately 20%.
Bonds are treading water with slim to no returns depending on maturity. Most investors started the year expecting interest rates to come down, however, that expectation has reversed with most analysts thinking the next move will be an increase. During this time money market rates have held steady at 3.4% providing some return on cash holdings.
Overall, the U.S. economy remained on solid ground. Net profit margins across the broad market reached a record 14.8% in Q1, suggesting that corporate America has become more efficient and resilient to inflationary shocks. Second-quarter earnings are also shaping up to be much stronger than previously expected.
The labor market showed signs of cooling with the June nonfarm payrolls increasing by only 57,000, missing forecasts and marking a sharp slowdown from previous months.
Inflation has re-emerged as a primary concern, driven by energy shocks linked to the conflict in the Middle East. The Consumer Price Index (CPI) spiked to an estimated 6.0% annualized average for Q2, while core services inflation remained "sticky" near 3.5%.
Heading into the third quarter, we remain optimistic. We are, however, concerned about rising systemic leverage, or investor borrowing. U.S. margin debt hit a record $1.4 trillion in May and assets in high-risk leveraged ETFs nearly doubled to $220 billion in early June. This "borrowing binge" has the potential to amplify and accelerate a market downturn should one occur.
Don’t hesitate to get in touch with us if you have questions or concerns about your investments or finances.
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