The second quarter of 2026 delivered the S&P 500's best quarterly gain since 2020 and the NASDAQ's second-best quarter since 2001. Markets earned those returns the hard way, absorbing the conflict with Iran, a spike in energy prices, sticky inflation, a Supreme Court ruling on tariffs, and a leadership change at the Federal Reserve. Below is a review of what happened last quarter, why markets held up, and what we are watching as the third quarter unfolds.
Looking back: how markets performed in Q2
S&P 500 — +15.2% in Q2; +10.2% year to date. Best quarterly gain since 2020, driven by earnings strength and policy support.
NASDAQ — +27.7% in Q2; +20.3% year to date. Second-best quarter since 2001 as AI infrastructure spending accelerated.
Dow 30 — +13.4% in Q2; +9.8% year to date. Blue chips participated as the rally spread beyond mega-cap technology.
Total returns including dividends. Quarterly figures cover 4/1/2026 through 6/30/2026; year-to-date figures through 6/30/2026. Source: Bloomberg.
The year-to-date figures tell the fuller story. Part of the second quarter's surge recovered ground lost in the first quarter, when the S&P 500 pulled back roughly 10% during the tariff and Iran headlines. Even accounting for that recovery, the first half ended solidly higher across the board.
The strength was not limited to large-cap technology. U.S. small caps gained 21.4% for the quarter and are up 22.6% for the year, while emerging markets rose 24.1% in Q2 (24.0% year to date) on the strength of their ties to the AI supply chain.
Earnings did the heavy lifting
The first-quarter earnings season, reported during Q2, was the strongest since 2021. Roughly 85% of S&P 500 companies beat earnings estimates, the best hit rate in five years, and all 11 sectors posted positive revenue growth for the first time in four years. Full-year 2026 earnings growth now stands near 23.6%. Over 126 years of market history, stocks and earnings have moved together with a 98% correlation, and that relationship carried the quarter.
The rally broadened
Beneath the headline numbers, market leadership widened. The equal-weighted S&P 500 outpaced the cap-weighted index for stretches of the first half, and nine of the 11 sectors in the small-cap index have outperformed their large-cap counterparts year to date. Dispersion was significant: memory and AI infrastructure names surged while software stocks fell sharply, and when the largest technology names pulled back in June, health care, industrials, and financials held their ground. Broader earnings participation tends to make a bull market more durable.
Bonds: higher for longer
The Federal Reserve held the funds rate at 3.50% to 3.75% at every meeting in the first half as core PCE inflation drifted up to roughly 3.4%. The 10-year Treasury yield stayed anchored in a 4.0% to 4.5% range, the yield curve flattened, and the Bloomberg U.S. Aggregate Bond Index returned about 0.6% for the quarter. Credit markets stayed calm; investment-grade and high-yield spreads remain near their recent averages, which historically signals little stress in the economy.
Inflation stayed sticky
Headline CPI jumped to 4.2% year over year, driven largely by energy prices tied to the Iran conflict. Core inflation was steadier at 2.9%, and unemployment held at 4.3%. The gap between the headline and core readings is the main reason the Fed has stayed patient rather than reactive.
Looking ahead: five things we are watching in Q3
1. Energy prices and geopolitics
The Iran conflict remains the largest wild card. So far, markets have looked through it because longer-dated oil futures near $73 suggest traders do not expect a prolonged supply shock. History supports that patience: across twenty major geopolitical events since 1941, the S&P 500 was higher one year later 80% of the time, with a median gain of 13.9%. A disruption to the Strait of Hormuz would change the math, and we are watching energy markets closely.
2. Inflation and the Federal Reserve
The Fed is on hold, and the debate has shifted. At the June meeting, 9 of 18 officials projected a rate hike before year-end. New Fed Chair Kevin Warsh has signaled a focus on shrinking the balance sheet rather than moving rates, and central banks abroad have already begun tightening; the ECB raised rates in June for the first time after eight consecutive cuts. We view this as a rate calibration cycle, not the start of a prolonged tightening campaign, but each hot inflation print will test that view.
3. Fiscal stimulus hits the economy
More than $400 billion in consumer and business tax provisions took effect this year, including roughly $150 billion in consumer refunds distributed in the first half and about $250 billion in business investment incentives such as 100% expensing. Financial deregulation is expected to follow. This support arrives just as last year's rate cuts work their way through the economy, which is a meaningful cushion for growth in the second half.
4. AI spending and market concentration
Hyperscalers are expected to spend more than $750 billion on AI infrastructure in 2026, and that capital spending has been the market's main engine. The top 10 stocks now account for roughly 38% of the S&P 500, so a stumble from any of the largest names could move the whole index. The offset is that today's leaders are far more profitable and more reasonably valued than the leaders of the 2000 tech bubble; the seven largest stocks trade near 24 times forward earnings versus 50 times at the dot-com peak. We are watching whether the broadening trend continues, because it reduces the market's dependence on a handful of companies.
5. Midterm election noise
Midterm years are historically the most volatile of the four-year presidential cycle, with an average intra-year decline of 19% for the S&P 500. They also set up well: the index has been higher in the 12 months following every midterm election since 1938. Expect louder political headlines as November approaches. We do not recommend changing an investment strategy based on election noise.
The bottom line
Pullbacks are normal, and one would not surprise us. The market averages three declines of 5% or more each year, and the average intra-year drawdown since 1928 is 16%. After each of the last six declines of 10% or more, the S&P 500 was higher one year later. Volatility is the price of admission, not a signal to exit.
Strong quarters tend to reward patience, not timing. Selling into strength after a rebound has historically hurt long-term investors. Since 1928, investors who waited for a 20% pullback before putting cash to work would have bought in below current prices only about 20% of the time; the decline they were waiting for usually arrived at higher levels.
Earnings, not headlines, drive returns. The short run is noise; the long run is profits. As long as earnings keep growing and monetary and fiscal policy remain supportive, the burden of proof sits with the bears.
Our approach: stay balanced and stay invested. Our investment strategies are built for a range of market conditions, including quarters like this one. We are watching the data, keeping allocations aligned with your long-term plan, and not chasing the rally or fearing it.
Questions about your portfolio heading into the second half of the year? Call the office at (615) 591-2490 or reach out through our contact page and we will find a time to talk.
Advisory services offered through United Advisor Group, LLC, a Registered Investment Adviser (CRD #324205). Securities offered through Purshe Kaplan Sterling Investments, Member FINRA/SIPC. Ftacek Financial Services, LLC and United Advisor Group are independent entities. Sources: Bloomberg, market data as of 6/30/2026; index returns include reinvested dividends. Indices are unmanaged, cannot be invested in directly, and index returns do not reflect the deduction of advisory fees or other expenses. Opinions are those of Ftacek Financial Services, LLC as of the date of publication and are subject to change; historical patterns may not repeat, and nothing herein should be read as a prediction or guarantee of future market behavior. Investing involves risk, including the potential loss of principal, and past performance does not guarantee future results. This article is for educational purposes only and is not individualized investment, tax, or legal advice. Consult your own advisors before acting on any strategy described.