2026 Q2 Market Commentary

Halftime

Summary

• U.S. large-cap stocks ended the quarter up 15%, and small-cap stocks gained 22%. U.S. intermediate-term bonds had modest gains, ending the quarter up 0.7%.
• The U.S. economy remained resilient as strong job growth, steady consumer spending, larger tax refunds, and improving lower-income household finances offset higher inflation.
• The U.S.–Iran conflict disrupted energy markets, pushing oil prices above $110 per barrel and gasoline prices sharply higher before conditions stabilized late in the quarter.
• The Federal Reserve entered a new era under Kevin Warsh, launching a review of its inflation framework, communications strategy, balance sheet policy, and the role of AI-driven productivity.
• AI remains a dominant market theme, but investor focus shifted from AI spending to AI returns, contributing to broader market leadership beyond mega-cap technology.

Overview

The whistle has blown on a quarter defined by geopolitical tensions and a continued artificial intelligence-related investment boom, set against the backdrop of a domestically hosted FIFA World Cup and the 250th anniversary of U.S. independence. U.S. large-cap stocks, as measured by the S&P 500 Index, closed at a new all-time high on June 2 and finished the quarter up 15%. U.S. small-cap stocks, represented by the Russell 2000 Index, performed even better, gaining a noteworthy 22%—their strongest quarterly return since the fourth quarter of 2020, when the index advanced 31%. U.S. intermediate-term bonds, as measured by the Bloomberg U.S. Aggregate Bond Index, posted a modest gain of 0.7%.

The labor market remained resilient throughout the second quarter. The U.S. economy added 365,000 new jobs over the past three-month period, despite continued layoffs in parts of the economy.¹ The technology sector remained the center of job cuts in the first half of 2026.² For the fourth consecutive month, artificial intelligence was cited as the primary driver of layoffs, with 23% of all announced job cuts in the first half of the year attributed directly to AI.²

The U.S. consumer also remained surprisingly strong. Personal spending increased by 0.4% in April and 0.7% in May.³ Meanwhile, wage growth (3.5% year-over-year in June) has not kept pace with inflation (4.2% year-over-year in May, the most recent reading).⁴ Larger-than-usual tax refunds following the passage of the One Big Beautiful Bill in July 2025 appear to have supported spending. Tax refunds were 18% higher than a year earlier, and the average refund increased about 12% to $3,280.⁵

A defining development during the quarter was the beginning of a new Federal Reserve Chair’s tenure (more on this later). As expected, the Federal Reserve left interest rates unchanged throughout the first half of the year.⁶ However, expectations for the path of rates shifted dramatically as energy prices pushed inflation higher amid the conflict in the Middle East. The rapid repricing reflected two key forces: inflationary pressure stemming from the Iran conflict and the continued resilience of the U.S. economy, underpinned by a resilient labor market and consumer.

Halftime

The U.S.–Iran conflict dominated headlines during the second quarter. Following the outbreak of hostilities on February 28, both countries significantly escalated their military campaigns. The conflict placed the Strait of Hormuz at the center of global attention, disrupting energy flows and contributing to fuel shortages worldwide.⁷ Tensions peaked in early April, with West Texas Intermediate crude oil rising to $113 per barrel and Brent crude reaching $118.⁸

Diplomatic efforts gained traction in April when the U.S. and Iran agreed to a Pakistan-mediated ceasefire on April 7, although violations by both sides persisted and the U.S. later imposed a naval blockade on vessels bound for Iranian ports.⁹ Negotiations remained fragile through May before culminating in a 14-point memorandum of understanding signed on June 17.¹⁰ The agreement established a framework for discussions covering navigation through the Strait of Hormuz, Iran’s nuclear and missile programs, and sanctions relief.¹⁰ While military operations formally ended, many key issues remain unresolved, and negotiations continue. The 60-day deadline outlined in the June 17 memorandum of understanding expires in mid-August.

Domestic energy markets reflected the impact of the Iran conflict. U.S. crude oil exports reached a record 6.4 million barrels per day in April and remained elevated through mid-June, benefiting domestic producers.¹¹ Even so, gasoline inventories fell to multi-year lows during the quarter, driving a sharp increase in fuel prices. Average pump prices for regular unleaded gasoline rose from $2.80 per gallon in early January to a peak of $4.60 on May 20 before ending June at $3.85.¹²

May 15 marked the start of a new era at the Federal Reserve. Kevin Warsh was nominated Federal Reserve Chair in January, and his April confirmation hearing outlined a framework centered on trimmed-mean inflation measures, the removals of forward guidance and the dot plot, and a belief that AI-driven productivity gains will ultimately prove disinflationary.^13,14 Those themes remained front and center at his first Federal Open Market Committee meeting on June 16–17. At the post-meeting press conference, Warsh announced five task forces focused on Fed communications, balance sheet policy, data sources, productivity and AI, and the inflation framework.¹⁵

The newly established task forces suggest a broad review of how monetary policy is communicated, implemented, and evaluated.¹⁵ The most consequential changes may emerge from the inflation framework review. Warsh appears focused on whether traditional headline inflation measures adequately capture underlying price pressures, and he seems interested in placing more emphasis on trimmed-mean measures that exclude extreme price movements.^15,16

A shift toward gauges such as the Cleveland Fed Trimmed Mean CPI would place greater emphasis on inflation trends rather than short-term volatility, potentially influencing both policy decisions and how inflation risks are communicated to markets. The Cleveland Fed’s 16% Trimmed-Mean CPI is derived from the Bureau of Labor Statistics’ CPI data and is calculated by excluding the most extreme price increases and decreases each month (approximately the highest 8% and lowest 8% of weighted price changes) and averaging the remainder, providing a clearer measure of underlying inflation trends.¹⁷

Despite a mixed political and economic backdrop, the U.S. consumer remained resilient throughout the second quarter and the first half of 2026. Consumer fundamentals remain healthy, and both personal income and spending (at 0.7% month-over-month in May) remained above five-year averages of 0.4% and 0.5%, respectively.^18,4 The Johnson Redbook Index (a higher-frequency datapoint which measures the weekly same-store sales at major U.S. retailers) rose to the highest non-pandemic-fueled level on record.¹⁹ Evidence emerged during the quarter that lower-income consumers may be recovering. According to PNC Bank credit card data, the spending gap between upper- and lower-income households narrowed from 4.5% at the end of 2025 to approximately 1.5% by June. Cash savings buffers for lower-income households also increased from 25 days to more than 30 days.²⁰ Similarly, Bank of America data showed that lower-income household spending reached its highest level in three years during June.²¹

Importantly, the 2026 FIFA World Cup was unlikely to be the primary driver of the strength. Most World Cup-related spending occurs in lodging, dining, transportation, and ticketing, categories that are not well captured by the Redbook Index. However, other data sources reflected strong activity. OpenTable (a measure of key restaurant performance metrics, guest spending behavior, and seated diner traffic) reported a 40% year-over-year increase in seated diners during the final week of June.²²

Consumers may see relief on certain goods’ prices in the coming months. On February 20, the Supreme Court ruled that President Trump lacked the authority to impose tariffs under the International Emergency Economic Powers Act (IEEPA), effectively invalidating the April 2025 “Liberation Day” tariffs.²³ On March 4, 2026, the U.S. Court of International Trade ordered Customs and Border Protection to refund at least $165 billion in improperly collected tariffs, injecting liquidity back into businesses and consumers.²⁴ According to court filings, as of the end of June, $71 billion had effectively been refunded, with $100 billion in the pipeline.^25,26 Walmart is expected to receive roughly $2.4 billion.²⁷ As Walmart CFO John Rainey noted:

“We think the single best return that we can have on a dollar of capital right now is to invest in the consumer and invest in price.”²⁸

Since the launch of ChatGPT in November 2022, the five largest U.S. hyperscalers (Amazon, Microsoft, Meta, Alphabet, and Oracle) have driven the largest corporate investment cycle on record. Capex increased from $156 billion in 2023 to $443 billion in 2025 and is expected to reach $700 billion in 2026 and over $900 billion in 2027.²⁹ Some estimates suggest that AI-related capex accounted for around 50% of U.S. GDP growth in 2025.³⁰ AI-related spending on data centers, chips, and networking equipment accounted for about 0.8% of U.S. GDP in the first quarter of 2026, helping push total computing infrastructure investment to 1.5% of GDP—more than double its average share between 2015 and 2022.³¹ Effectively, the AI hyperscalers have been sponsoring much of the strength in the U.S. economy and in equity markets for nearly four years. This trend shifted in the first half of 2026. As AI capex accelerated, free cash flow came under pressure. Alphabet’s first-quarter free cash flow fell 47% year-over-year, while Amazon’s declined 95% under the weight of AI infrastructure spending.²⁹

Market breadth (the percentage of stocks participating in a market advance or decline) improved steadily during the second quarter. More than 60% of S&P 500 constituents ended the period above their 200-day moving averages.³² U.S. small-cap stocks outperformed their large-cap counterparts by 6%, while a broader mix of companies reached new highs. This suggests that market leadership may be expanding beyond the mega-cap technology companies that have dominated returns in recent years. Earnings expectations for the remainder of 2026 support this view. Energy (66%), Information Technology (49%), and Materials (39%) are expected to lead S&P 500 earnings growth, while overall index earnings are projected to increase by 24% on 11% revenue growth.³³

Markets

Emerging markets remained resilient, particularly given disproportionate exposure to Middle Eastern oil, ending the quarter up a noteworthy 24%. Among emerging markets, Taiwan (+49%) and Korea (+88%) stood out as top performers due to outsized gains by a handful of semiconductor and AI-related names. In Korea, chip maker SK Hynix rose by over 220% in the second quarter while electronic giant Samsung gained nearly 100%. In Taiwan, the Taiwan Semiconductor Manufacturing Company (TSMC) gained 36% in the second quarter. The MSCI China Index ended the second quarter down 7%, bringing Chinese equities down nearly 15% year-to-date. The MSCI India Index gained 10% in the second quarter, bringing year-to-date returns to -10% for the country.

Fixed-income markets remained relatively muted through the second quarter. U.S. intermediate-term bonds posted modest gains, ending the quarter up 0.7% despite an upward shift in the yield curve over the quarter. After rising to 4.66% on May 19, the 10-year U.S. Treasury yield ended the quarter at 4.42%.

Looking Forward

We are focused on how the AI buildout transitions from a story of capacity expansion to one of monetization, profitability, and broader economic productivity. The key question is whether hyperscalers’ AI spending will generate enough returns to support expectations for more than 20% S&P 500 earnings growth in 2026 and continued margin expansion across industries. Meta’s decision to lease excess AI compute highlights a growing debate around whether bottlenecks are easing and if supply is catching up with demand. Within the AI ecosystem, we continue to see opportunity in areas such as power and nuclear infrastructure, though we expect a more volatile path as project delays, capacity additions, and cyclical pressures emerge. Ultimately, the next phase of the AI trade may be defined less by who builds the infrastructure and more by which companies successfully convert AI adoption into sustainable revenue growth, margin expansion, and free cash flow.

We are monitoring the outcomes of Kevin Warsh’s five Federal Reserve task forces, particularly whether they result in changes to how inflation is measured and to Fed communications, including a potential shift toward trimmed-mean inflation measures. Beyond monetary policy, we are watching the reopening of the IPO market, an evolving supply backdrop for U.S. equities, and signs that market leadership is broadening beyond AI capex beneficiaries toward sectors such as Healthcare, Financials, Energy, and Real Estate.

Disclosures

Investment advisory services offered through SBE LLC dba Cedar Cove Wealth Partners, a registered investment advisor with the U.S. Securities and Exchange Commission.

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Performance Disclosures

All market pricing and performance data from Bloomberg, unless otherwise cited. Asset class and sector performance are gross of fees unless otherwise indicated.

Citations

1. 1. Bureau of Labor Statistics: https://www.bls.gov/news.release/empsit.nr0.htm
   2. Challenger, Gray & Christmas: https://www.challengergray.com/blog/challenger-report-june-layoffs-cool-to-45849-down-53-from-may-ai-leads-reasons-for-fourth-consecutive-month/
   3. Bureau of Economic Analysis: https://www.bea.gov/data/consumer-spending/main
   4. Federal Reserve Bank of St. Louis: https://fred.stlouisfed.org/series/CES0500000003#
   5. IRS: https://www.irs.gov/newsroom/filing-season-statistics-for-week-ending-may-8-2026
   6. Federal Reserve Bank of St. Louis: https://fred.stlouisfed.org/series/FEDFUNDS
   7. IEA: https://www.iea.org/topics/the-middle-east-and-global-energy-markets
   8. com: https://oilprice.com/oil-price-charts/
   9. CNBC: https://www.cnbc.com/2026/04/07/trump-iran-ceasefire-hormuz-strait.html
   10. Reuters: https://www.reuters.com/world/middle-east/14-point-draft-us-iran-deal-2026-06-17/
   11. S. Energy Information Administration: https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=WCREXUS2&f=W
   12. AAA: https://gasprices.aaa.com/
   13. Wall Street Journal: https://www.wsj.com/economy/central-banking/key-moments-from-kevin-warshs-congressional-testimony-1e1cec0b
   14. Bloomberg: https://www.bloomberg.com/news/articles/2026-04-21/kevin-warsh-s-fed-confirmation-hearing-key-takeaways-on-interest-rates-policy
   15. Federal Reserve: https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20260617.pdf
   16. Wall Street Journal: https://www.wsj.com/economy/central-banking/kevin-warsh-wants-the-fed-to-think-about-inflation-differently-64272e0a
   17. Federal Reserve Bank of Cleveland: https://www.clevelandfed.org/indicators-and-data/median-cpi
   18. Bureau of Economic Analysis: https://www.bea.gov/data/income-saving/personal-income
   19. MacroMicro: https://en.macromicro.me/charts/23462/us-redbook-same-store-index
   20. PNC: https://www.pnc.com/content/dam/pnc-com/pdf/aboutpnc/EconomicReports/consumer_health_check/PNC_Research_Consumer_Health_Check_June_2026.pdf
   21. Bank of America: https://institute.bankofamerica.com/content/dam/economic-insights/consumer-checkpoint-july-2026.pdf
   22. OpenTable: https://www.opentable.com/c/state-of-industry/#seated-diners-chart
   23. Reuters: https://www.reuters.com/legal/government/us-supreme-court-rejects-trumps-global-tariffs-2026-02-20/
   24. Reuters: https://www.reuters.com/world/us/judge-orders-trump-administration-finalize-goods-entering-us-without-assessing-2026-03-04/
   25. Cato Institute: https://www.cato.org/blog/ieepa-refunds-update-good-progress-still-ways-go
   26. S. Court of International Trade: https://storage.courtlistener.com/recap/gov.uscourts.cit.17610/gov.uscourts.cit.17610.39.0.pdf
   27. CNBC: https://www.cnbc.com/2026/05/22/trump-tariff-refunds-walmart-home-depot-target-apply.html
   28. NPR: https://www.npr.org/2026/05/21/nx-s1-5829712/walmart-price-cuts-gas-tariff-refunds
   29. Bloomberg data series
   30. Bank for International Settlements: https://www.bis.org/publ/bisbull120.pdf
   31. Epoch AI: https://epoch.ai/data-insights/ai-datacenter-share-gdp
   32. Bloomberg data series
   33. FactSet: https://advantage.factset.com/hubfs/Website/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_071026.pdf

Index Definitions

S&P 500 Index: Widely regarded as the best single gauge of the U.S. equities market. The index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. The S&P 500 Index focuses on the large-cap segment of the market; however, since it includes a significant portion of the total value of the market, it also represents the market.

MSCI ACWI: (ACWI: All Country World Index) a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets.

MSCI EAFE Index: (EAFE: Europe, Australasia, Far East) a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada.

MSCI EAFE Small Cap Index: (EAFE: Europe, Australasia, Far East) a free float-adjusted market capitalization index that is designed to measure the small cap equity market performance of developed markets, excluding the US & Canada.

MSCI EM Index: A free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets.

Russell 1000 Index: Measures the performance of the 1,000 largest companies in the Russell 3000.

Russell 2000 Index: Measures the performance of the 2,000 smallest companies in the Russell 3000 Index.

Russell 3000 Index: Measures the performance of the 3,000 largest U.S. companies based on total market capitalization.

Bloomberg U.S. Aggregate Bond Index: A broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate pass-throughs), ABS and CMBS (agency and non-agency).

Bloomberg Global Aggregate Index: A multi-currency measure of global investment grade debt from twenty-four local currency markets. This benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers.

Bloomberg Global Aggregate ex-USD Index: A multi-currency measure of investment grade debt from 24 local currency markets. This benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers. Bonds issued in USD are excluded.

Bloomberg Municipal Index: Consists of a broad selection of investment- grade general obligation and revenue bonds of maturities ranging from one year to 30 years. It is an unmanaged index representative of the tax-exempt bond market.

Bloomberg US High Yield Index: Covers the universe of fixed rate, non-investment grade debt. Eurobonds and debt issues from countries designated as emerging markets (sovereign rating of Baa1/BBB+/BBB+ and below using the middle of Moody’s, S&P, and Fitch) are excluded, but Canadian and global bonds (SEC registered) of issuers in non-EMG countries are included.

Bloomberg 1-3 Month U.S. Treasury Bill Index: Includes all publicly issued zero-coupon US Treasury Bills that have a remaining maturity of less than 3 months and more than 1 month, are rated investment grade, and have $250 million or more of outstanding face value. In addition, the securities must be denominated in U.S. dollars and must be fixed rate and non-convertible.

J.P. Morgan Emerging Market Bond Global Index (EMBI): Includes U.S. dollar denominated Brady bonds, Eurobonds, traded loans and local market debt instruments issued by sovereign and quasi-sovereign entities.

Alerian MLP Index: A composite of the 50 most prominent energy Master Limited Partnerships (MLPs) that provides investors with an unbiased, comprehensive benchmark for the asset class.

Bloomberg Commodity Index: Composed of futures contracts on physical commodities and represents twenty two separate commodities traded on U.S. exchanges, with the exception of aluminum, nickel, and zinc.

S&P Global Ex-U.S. Property Index: Measures the investable universe of publicly traded property companies domiciled in developed and emerging markets excluding the U.S. The companies included are engaged in real estate related activities such as property ownership, management, development, rental and investment

MSCI US REIT Index: A free float-adjusted market capitalization weighted index that is comprised of equity Real Estate Investment Trusts (REITs). The index is based on the MSCI USA Investable Market Index (IMI), its parent index, which captures the large, mid and small cap segments of the USA market. With 150 constituents, it represents about 99% of the US REIT universe and securities are classified under the Equity REITs Industry (under the Real Estate Sector) according to the Global Industry Classification Standard (GICS®), have core real estate exposure (i.e., only selected Specialized REITs are eligible) and carry REIT tax status.

S&P Global Infrastructure Index: Designed to track 75 companies from around the world chosen to represent the listed infrastructure industry while maintaining liquidity and tradability. To create diversified exposure, the index includes three distinct infrastructure clusters: energy, transportation, and utilities.

LBMA Gold Price Index: The global benchmark prices for unallocated gold and silver delivered in London. ICE Benchmark Administration Limited (IBA) operates electronic auctions for spot, unallocated London gold and silver, providing a market-based platform for buyers and sellers to trade. The auctions are run at 10:30am and 3:00pm London time for gold and at 12:00pm London time for silver. The final auction prices are published to the market as the LBMA Gold Price AM, the LBMA Gold Price PM and the LBMA Silver Price benchmarks, respectively. The price formation for each auction is in US Dollars.