Stocks Post Impressive Second Quarter &
Year-to-Date Returns Despite Mixed Results in June
HIGHLIGHTS:
- Stocks: Stocks turned in impressive results in the second quarter. Technology led the rally from the March lows, but small caps and value closed out the quarter with better results in June. Overall, it has been a great first half of 2026 for stocks.
- Bonds: The 10-year U.S. Treasury yield hit its highest level in mid-May, but rates declined from that point through June. The downward move in rates helped the broad bond indices post positive results for the month
and quarter. - U.S. Economy: Inflation data remains elevated, but the recent drop in oil prices should dampen inflation pressures in the months ahead. The job market remained strong, and consumers continue to spend.
- Federal Reserve: Kevin Warsh chaired his first meeting at the FOMC in June and, as expected, kept rates unchanged. However, he struck a more hawkish tone in his discussion on price stability, which raised odds of a 2026 rate hike.
Equity Markets
The character of the rally changed in June, but overall, the second quarter results were strong. After a rather narrow rally from the March lows that large-cap growth and tech stocks led once again, some rotation occurred in June with small caps and value stocks leading the way. The Nasdaq and Russell 2000 led the pack with impressive results in the second quarter, and stocks enjoyed double-digit returns year to date across the board (outside of a minor miss by the Dow). See Table 1 for June, Q2, and YTD returns.
Table 1 | Equity Markets
| Index | June 2026 | Q2 2026 | YTD |
| S&P 500 | -0.95% | 15.20% | 10.21% |
| S&P 500 Equal Weight | 2.38% | 11.39% | 12.13% |
| DJIA | 2.71% | 13.38% | 9.76% |
| Russell 3000 | -0.30% | 15.44% | 10.88% |
| NASDAQ Comp. | -2.75% | 21.60% | 13.13% |
| Russell 2000 | 3.74% | 21.49% | 22.57% |
| MSCI ACWI ex U.S. | -0.59% | 14.49% | 13.68% |
| MSCI Emerging Mkts Net | -1.41% | 24.05% | 23.85% |
Source: Morningstar. For illustrative purposes only. Indexes are unmanaged and have been provided for comparison purposes only. No fees or expenses are reflected. You cannot invest directly in an index. Past performance is not indicative of future results.
Large-cap growth stocks fell behind in the first quarter but roared back in the second quarter, driven by April and May results. Small caps and value stocks fared better early in the year and recovered as well following the Iran conflict sell-off, with small caps showing the best year-to-date results of the U.S. stock indices. Earnings growth has been the key driver of stock returns so far this year as earnings estimates have gone up faster than stock prices. As a result, valuations have improved from the start of the year through the halfway point of 2026. We are mindful of potential volatility developing as we move toward midterm elections and continue to get used to the new leadership at the Fed – two scenarios that historically have tended to heighten volatility in the market. With that said, the fundamental backdrop of strong earnings growth by U.S. companies continues to keep us constructive on the stock market moving through the balance of 2026.
International stocks, particularly emerging markets, had strong returns for the second quarter, as well. Some countries with heavy tech weights (like Taiwan and South Korea) proved especially strong during the quarter as the AI theme led much of the broader market rally. Overall, both U.S. and international stocks have turned in impressive results so far in 2026.
Fixed Income
The 10-year U.S. Treasury closed May 19 at 4.67%, the highest level since early January 2025, but it drifted lower from that point through June. By the end of the second quarter, the 10-year closed at 4.44% and the declining rate environment created a positive backdrop for bonds to recover from what had generally been a rising rate environment in 2026. See Table 2 for bond index returns for June, Q2, and YTD bond returns.
Table 2 | Fixed Income Markets
| Index | June 2026 | Q2 2026 | YTD |
| Bloomberg U.S. Agg | 0.24% | 0.67% | 0.62% |
| Bloomberg U.S. Credit | 0.20% | 1.33% | 0.85% |
| Bloomberg U.S. High Yld | 0.27% | 2.47% | 1.96% |
| Bloomberg Muni | 0.96% | 2.50% | 2.32% |
| Bloomberg 30-year U.S. TSY | 1.18% | 0.88% | 0.74% |
| Bloomberg U.S. TSY | 0.28% | 0.32% | 0.28% |
Source: Morningstar. For illustrative purposes only. Indexes are unmanaged and have been provided for comparison purposes only. No fees or expenses are reflected. You cannot invest directly in an index. Past performance is not indicative of future results.
Munis and high yield bonds were neck and neck for the quarter, with munis turning in the best results so far this year. High yield has shown strong relative performance as well, which we would expect during a time of such strong stock market returns. Treasury index returns have generally lagged this year as rates have moved higher, but they made up ground with gains in June as rates dropped. (The front end of the yield curve is a different story as those rates have trended higher as the market has gone from expecting rate cuts in 2026 to a potential increase in rates by the Fed before year end.) After a challenging first quarter for bonds, second quarter results have pushed all the bond indices tracked in the table into positive territory for the year.
We maintain our longstanding position favoring credit versus pure rate exposure in this interest rate environment. The story has been much more about the general move higher in interest rates so far this year (not changes in credit spreads), particularly after the conflict with Iran began. However, rates have moved lower from those levels in recent weeks. We believe the role bonds play in a portfolio, to provide stable cash flow and to help offset the volatility of stocks in the long run, has not changed. With uncertainty ahead, we believe having an active bond management approach makes sense. Furthermore, rates remain elevated and we believe this provides attractive opportunities for bond investors.
Economic Data Highlights and Outlook
The conflict with Iran caused oil prices, and subsequently inflation data, to rise. However, with the signing of the memorandum of understanding, oil prices have tumbled and returned to near pre-conflict levels. Importantly, gasoline prices have moved lower and have taken some pressure off consumers in recent weeks. Hopefully, as gas prices continue to fall, consumers will keep spending and become more confident about their economic prospects. Chart 1 clearly shows the strong relationship between oil prices and gas prices, which have both made dramatic moves lower in recent weeks.
Chart 1
Wholesale prices continued to surge in May. The Producer Price Index (PPI) for May rose 1.1%, exceeding estimates of 0.7%. The annual reading jumped to 6.5%, which also surpassed expectations. The core PPI showed a softer increase of 0.4% with an annual increase of 4.9%. Both readings were less than expected. The Consumer Price Index (CPI) rose in May as well, but largely in line with expectations. Headline CPI was up 0.5% for the month and 4.2% for the year, with core levels up 0.2% and 2.9%, respectively.
The Personal Consumption Expenditures (PCE) price index also rose largely in line with estimates. Headline PCE increased 0.4% for the month and 4.1% for the year, with core rising 0.3% and 3.4%, respectively. Oil prices started their rather steady drop from well over $100 per barrel in May to around $70 per barrel by the end of June. We will watch inflation readings closely to see the impact from declining oil prices. Clearly, inflation has been heading in the wrong direction in recent months, but this trend should improve with energy prices moving lower. Chart 2 shows the recent rise in headline inflation.
Chart 2
Broader economic data has remained solid. The labor market showed ongoing gains in May. Payrolls increased by 172,000, much stronger than the 88,000 estimate, and April payrolls were revised to 179,000 additions from the initial estimate of 115,000. The unemployment rate remained at 4.3% as expected. Average hourly earnings increased by 3.4% in May on an annual basis as expected, but this remains below headline inflation, meaning consumers are losing purchasing power. At just below 7.6 million, job openings have risen in recent months and sit at a two-year high. Job data has been stronger in recent months and could be supportive of ongoing consumer spending activity. Chart 3 below shows the unemployment rate, which has held steady for most of the last year, and job openings, which have increased in recent months.
Chart 3
The Institute for Supply Management (ISM) Manufacturing Index remained positive in May for the fifth consecutive month. The ISM Manufacturing Index showed expansion with a reading of 54.0 compared to estimates of 53.0. (The June mark came in at 53.3, which was below estimates of 53.9, but still in growth territory.) The ISM Non-Manufacturing Index, which covers the much larger service industries in the U.S. economy, continued to reflect expansion. This reading improved to 54.5 for May, surpassing estimates of 53.8 and the prior mark of 53.6. Non-Manufacturing has expanded in 23 of the last 25 months. Recall that for the ISM indices, readings above 50 represent expansion, while readings below 50 reflect contraction.
Consumer spending held up in May, as well. Retail sales (ex. auto and gas) increased by 0.5%, beating estimates of 0.3%. Consumer sentiment readings have been weak for some time, but we have not seen that translate into a meaningful drop in consumer spending. The preliminary University of Michigan Consumer Sentiment reading finally stopped its recent slide with a reading of 48.9 in June, surpassing estimates of 46.0 and improving from the final May reading of 44.8. Recall that the May reading was the worst in this survey’s history back to 1952. Although survey data suggest consumers remain somewhat pessimistic, stocks near all-time highs and the Iran conflict now in peace negotiations seem to have pushed confidence levels higher. Lower gasoline prices should also help the mood of consumers. Despite weak confidence readings, consumers have continued to spend, and this “hard” data has lined up better with consumer actions versus the “soft” data of sentiment surveys.
The third reading of Q1 GDP was revised higher to 2.1% annualized growth from the second estimate and expectations of 1.6%. The personal consumption component dropped in the third reading, but a decline in imports more than offset that drop, resulting in a net revision higher to GDP. The GDPNow forecast from the Atlanta Fed for Q2 2026 GDP shows expected growth at a 2.5% annualized rate as of June 30, 2026.
Kevin Warsh presided over his first FOMC meeting in June. At first glance, Chairman Warsh appears to want to reduce forecast data from the Fed. The post-FOMC statement was materially shorter than prior ones, and he abstained from providing his own “dot plots,” which give forward opinions of policy makers. Chairman Warsh appeared more hawkish than many expected, and the market has been pricing in the possibility of a rate hike in 2026. Currently, the market is pricing in a 65% chance of a rate hike at the September FOMC meeting, but the odds hold rates steady after that through September 2027 per the CME FedWatch tool as of June 30, 2026.
The market seems to have moved past the conflict with Iran. Reports of breaches in the ceasefire are met with little market reaction, and oil prices have plunged since the initial stages of the war and sit near pre-conflict levels. Corporate earnings growth and the disruption of the new AI technology reality have fueled stock prices higher. Earnings growth has been stronger than stock price appreciation, so valuations have improved from the beginning of the year. We believe the U.S. economy remains resilient. Inflation is elevated but might be poised to slow down with the sharp move lower in oil prices. Elevated gas prices, which clearly were a headwind for many Americans in recent months, should be easing as well in the weeks ahead. The job market continues to look stable, if not improving, which is often the key factor behind household consumption. As always, we believe it is imperative for investors to stay focused on their long-term goals and not let short-term swings in the market, which could materialize at any time, derail them from their longer-term objectives.
Economic Data
| Event | Period | Estimate | Actual | Prior | Revised |
|---|---|---|---|---|---|
| ISM Manufacturing | May | 53.0 | 54.0 | 52.7 | — |
| ISM Services Index | May | 53.8 | 54.5 | 53.6 | — |
| Change in Nonfarm Payrolls | May | 88k | 172k | 115k | 179k |
| Unemployment Rate | May | 4.3% | 4.3% | 4.3% | — |
| Average Hourly Earnings YoY | May | 3.4% | 3.4% | 3.6% | — |
| JOLTS Job Openings | May | 7296k | 7594k | 7618k | 7585k |
| PPI Final Demand MoM | May | 0.7% | 1.1% | 1.4% | 1.1% |
| PPI Final Demand YoY | May | 6.4% | 6.5% | 6.0% | 5.7% |
| PPI Ex Food and Energy MoM | May | 0.5% | 0.4% | 1.0% | 0.7% |
| PPI Ex Food and Energy YoY | May | 5.4% | 4.9% | 5.2% | 4.9% |
| CPI MoM | May | 0.5% | 0.5% | 0.6% | — |
| CPI YoY | May | 4.2% | 4.2% | 3.8% | — |
| CPI Ex Food and Energy MoM | May | 0.3% | 0.2% | 0.4% | — |
| CPI Ex Food and Energy YoY | May | 2.9% | 2.9% | 2.8% | — |
| Retail Sales Ex Auto and Gas | May | 0.3% | 0.5% | 0.5% | — |
| Industrial Production MoM | May | 0.3% | 0.1% | 0.7% | 0.9% |
| Building Permits | May P | 1418k | 1413k | 1423k | __ |
| Housing Starts | May | 1430k | 1177k | 1465k | 1392k |
| New Home Sales | May | 640k | 580k | 622k | 626k |
| Existing Home Sales | May | 4.07m | 4.17m | 4.02m | 4.04m |
| Leading Index | May | 0.1% | 0.1% | 0.1% | 0.2% |
| Durable Goods Orders | May P | -5.0% | -4.5% | 8.0% | 8.5% |
| GDP Annualized QoQ | 1Q T | 1.6% | 2.1% | 1.6% | — |
| U. of Mich. Sentiment | June P | 46.0 | 48.9 | 44.8 | — |
| Personal Income | May | 0.4% | 0.7% | 0.0% | — |
| Personal Spending | May | 0.6% | 0.7% | 0.5% | 0.4% |
| S&P Cotality CS 20-City YoY NSA | Apr | 0.90% | 1.14% | 0.83% | 0.88% |
Source: Bloomberg; P=Preliminary, T=Third Reading
For illustrative purposes only. Past performance is not indicative of future results. Neither past actual, projections, nor other forward looking statements regarding future financial performance of markets are only projections and actual events or results may differ materially.
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