Aldrich Wealth’s Nicole Rice, Partner + Chief Growth Officer, and Darin Richards, Partner + Chief Investment Officer, share their latest market commentary, reflecting on Q2 2026 market performance and what to expect as we move into Q3 2026.

The S&P 500 rose 15.2% in Q2, marking its strongest quarterly performance in six years as exceptional corporate earnings and continued investment in AI outweighed geopolitical uncertainty, rising inflation, and slowing economic momentum. Developed international markets, as measured by the MSCI EAFE, increased 10.8%, supported by resilient equity markets, improving business activity, and relatively supportive monetary policy despite renewed inflation pressures. Emerging markets, as measured by the MSCI Emerging Markets Index, gained 24.1%, driven by exceptional performance in South Korea and Taiwan as continued investment in AI and semiconductor manufacturing more than offset ongoing weakness in China. In fixed income, the Bloomberg U.S. Universal Index rose 0.9% as investors continued to favor higher-yielding sectors despite rising Treasury yields and a sharp shift in expectations for Federal Reserve policy. Q1 GDP accelerated as business investment and net exports replaced consumer spending as the primary drivers of economic growth. At the same time, the Fed maintained interest rates amid renewed inflation pressures and a gradually cooling labor market.

The S&P 500 gained 15.2% over Q2 2026, marking its strongest quarterly performance in six years as investors looked past a backdrop of geopolitical uncertainty, rising inflation, and slowing economic momentum. Markets rebounded sharply in April after a temporary ceasefire between Israel and Iran eased fears of a broader regional conflict. However, volatility remained elevated as negotiations stalled and energy markets reacted to ongoing uncertainty. Oil prices briefly surged above $120 per barrel amid concerns over supply disruptions before retreating later in the quarter as fears of a prolonged disruption faded. Despite the uncertain backdrop, equities continued to advance on the back of exceptional corporate earnings and sustained enthusiasm surrounding artificial intelligence (AI).

Second-quarter earnings growth is on pace to exceed 20%, which would mark the strongest earnings growth since 2004, helping investors look beyond weakening consumer confidence, softer economic data, and renewed inflation pressures. At the same time, the composition of economic growth continued to shift, with business investment—particularly in technology and AI infrastructure—playing a larger role as consumer spending moderated. The Federal Reserve left interest rates unchanged throughout the quarter, but the policy outlook shifted considerably. Markets entered the quarter expecting multiple interest rate cuts in 2026 as inflation appeared to be moderating. By quarter-end, however, persistent inflation pressures and resilient economic data led investors to instead price in one to two potential rate hikes, marking a sharp reversal in expectations.

Nine of the 11 underlying sectors of the S&P 500 rose in Q2, though the dispersion between the best- and worst-performing sectors remained significant. Technology was the clear leader, surging 32.8% as continued enthusiasm surrounding AI fueled strong earnings, capital spending, and investor demand for companies tied to semiconductors, cloud computing, and AI infrastructure. Industrials followed, gaining 14.9% as investment in data centers, electrical equipment, and other AI-related infrastructure supported earnings and growth expectations. Conversely, energy was the weakest-performing sector, declining 13.5% as oil prices retreated toward pre-conflict levels following the easing of Middle East supply concerns, reversing much of the sector’s strong first-quarter outperformance.

Q2 finished with small-cap stocks besting large-cap stocks for the second consecutive quarter, as investors grew more comfortable taking on risk despite a mixed economic backdrop. Growth stocks also outpaced value stocks, reflecting the quarter’s leadership in technology and other sectors benefiting from continued investment in AI infrastructure. In contrast, value-oriented sectors gave back some of their first-quarter gains.

International developed markets, as measured by the MSCI EAFE Index, rose 10.8% during Q2, benefiting from resilient equity markets despite renewed inflation pressures and elevated geopolitical uncertainty. In the eurozone, rising energy prices tied to the conflict in the Middle East pushed inflation back above the European Central Bank’s 2% target, prompting policymakers to leave interest rates unchanged while emphasizing a cautious, data-dependent approach. Although higher energy costs weighed on consumer confidence and economic growth expectations, manufacturing activity remained a relative bright spot, with factory output and new orders continuing to improve throughout the quarter.

The euro strengthened modestly against the U.S. dollar for much of the quarter before giving back some gains in June as expectations for higher U.S. interest rates supported the dollar. In the United Kingdom, inflation also accelerated on higher energy and transportation costs, leading the Bank of England to maintain its policy rate while signaling a measured approach to future easing. Economic activity softened as consumer spending weakened, business confidence deteriorated, and job vacancies fell to their lowest level in five years. In Japan, equities continued to outperform, supported by resilient domestic conditions, a tight labor market, and ongoing demand for the country’s export-oriented manufacturers. The Bank of Japan maintained its gradual policy normalization stance throughout the quarter while monitoring wage growth and inflation, as improving corporate earnings and continued strength in global technology demand helped offset ongoing trade uncertainty.

Elsewhere, the MSCI Emerging Markets Index skyrocketed 24.1% in Q2, with performance varying significantly across countries. China, now the third-largest constituent of the index, declined 6.6% as persistent weakness in domestic demand, ongoing stress in the property sector, and subdued consumer confidence continued to weigh on investor sentiment. While policymakers maintained a supportive stance through targeted stimulus measures and manufacturing activity returned to expansion by quarter-end, the recovery remained heavily dependent on exports and AI-related technology demand rather than broad-based domestic growth.

In contrast, South Korea and Taiwan delivered exceptional returns, surging 87.6% and 48.9%, respectively. Both markets benefited from soaring global demand for semiconductors, continued investment in AI infrastructure, and robust foreign investor inflows, as companies tied to advanced chip manufacturing remained among the quarter’s strongest performers. South Korea also benefited from record semiconductor exports and renewed government support for its AI and chip industries, reinforcing optimism surrounding its role in the global technology supply chain. The sharp divergence between China and the region’s technology-focused economies underscored the increasingly uneven nature of emerging market performance, with countries leveraged to AI-related investment and semiconductor production continuing to meaningfully outperform those facing structural economic headwinds.

Over Q2 2026, the Bloomberg U.S. Aggregate Index increased by 0.7%, and the broader Bloomberg U.S. Universal Index rose 0.9%. Following hotter-than-expected inflation data and resilient labor market conditions, the Federal Reserve left interest rates unchanged throughout the quarter. Still, it signaled that additional rate hikes could be warranted if inflation pressures persist. As markets shifted from expecting multiple interest rate cuts earlier in the year to pricing in the possibility of one to two rate hikes, Treasury yields moved higher across the curve. The yield on the 10-year U.S. Treasury rose 11 basis points during Q2, ending at 4.44%. In comparison, the more policy-sensitive two-year Treasury increased 33 basis points as investors reassessed the path of monetary policy.

Credit spreads widened modestly during the quarter but remained relatively stable, reflecting continued confidence in corporate credit despite heightened geopolitical uncertainty. Investors favored higher-yielding sectors, with emerging market debt posting the strongest fixed income return, rising 3.3% as improving global risk appetite and attractive relative yields outweighed concerns surrounding a stronger U.S. dollar and elevated interest rates. High-yield bonds followed closely behind, returning 2.5% as resilient corporate fundamentals and relatively low default expectations supported demand for below-investment-grade debt. In contrast, returns across short- and intermediate-duration government and investment-grade corporate bonds were more muted as rising Treasury yields offset much of the income generated during the quarter.

U.S. gross domestic product (GDP) grew at an annualized rate of 2.1% over the first quarter of 2026, the latest period for which data are available, marking a notable improvement from the prior quarter’s slowdown. The composition of the growth, however, looked markedly different from recent years. Rather than being driven primarily by consumer spending, business investment emerged as the largest contributor to GDP as companies accelerated capital expenditures, particularly in technology, AI infrastructure, and equipment. Net exports also contributed meaningfully to growth as businesses adjusted trade flows ahead of potential tariff changes, with stronger exports and lower imports providing an additional boost to headline GDP. Together, these shifts suggest economic growth is becoming increasingly reliant on business spending and trade activity as consumers begin to feel the effects of higher prices and elevated interest rates.

Labor market conditions continued to soften over Q2, though the broader employment picture remained relatively stable. Hiring slowed throughout the quarter, with job growth increasingly coming in below expectations as businesses adopted a more cautious approach amid persistent inflation and economic uncertainty. Wage growth also continued to moderate, signaling that demand for labor is gradually easing after several years of exceptionally tight conditions. Although the unemployment rate declined late in the quarter, the improvement was largely driven by lower labor force participation rather than stronger hiring, suggesting underlying labor market momentum has weakened. Overall, employment conditions appear to be normalizing rather than deteriorating sharply, though slower hiring and moderating wage growth may weigh on consumer spending going forward.

The Fed faced an increasingly challenging policy environment throughout Q2 as inflation pressures reemerged despite signs of moderating economic growth. Rising energy prices pushed headline inflation higher, while core inflation and producer prices accelerated, suggesting price pressures had broadened beyond energy alone. Although labor market conditions softened and economic activity slowed, inflation remained well above the Fed’s long-term target, leading policymakers to leave interest rates unchanged throughout the quarter.

At his first meeting as Federal Reserve Chair, Kevin Warsh emphasized a data-dependent approach, noting that additional policy tightening could be warranted if inflation failed to moderate. As a result, markets dramatically reassessed the outlook for monetary policy, shifting from expectations for multiple interest rate cuts at the start of the quarter to pricing in the possibility of one to two rate hikes by quarter-end.

U.S. markets enter the second half of 2026 with momentum, though the backdrop has become more complicated. Strong earnings growth and continued investment in AI infrastructure remain meaningful supports for equities, particularly as business spending has become a larger driver of economic growth. However, the sharp rally in Q2 has also pushed valuations higher, leaving markets more sensitive to disappointment if earnings growth slows or AI-related investment fails to translate into sustained profitability.

At the same time, persistent inflation and a more hawkish Fed may limit the support that falling interest rates were previously expected to provide. While the labor market continues to normalize rather than deteriorate sharply, slower hiring and moderating wage growth could weigh on consumer spending in the months ahead. As a result, market performance may become increasingly dependent on earnings durability and broader participation beyond the largest technology-oriented companies.

Developed international markets remain well-positioned heading into the second half of 2026, supported by attractive valuations, resilient corporate fundamentals, and improving business activity. While renewed inflation pressures have prompted central banks to adopt a more cautious approach, monetary policy outside the United States remains comparatively supportive. In Europe, stabilizing manufacturing activity and improving corporate earnings could continue to support equity markets if energy prices remain contained. Japan continues to stand out, benefiting from a resilient economy, improving corporate governance, and strong global demand for its export-oriented technology and industrial companies. Although geopolitical risks and higher commodity prices remain important headwinds, developed international markets could outperform if global growth stabilizes and market leadership broadens beyond the largest U.S. technology companies.

Emerging markets face an increasingly uneven outlook as structural differences between countries continue to shape performance. China’s recovery remains dependent on additional policy support and stronger domestic demand, while ongoing weakness in the property sector continues to weigh on longer-term growth. In contrast, technology-oriented economies such as South Korea and Taiwan remain well-positioned to benefit from continued investment in AI, semiconductor manufacturing, and digital infrastructure. While emerging markets remain sensitive to shifts in global growth, trade policy, and currency movements, continued demand for AI-related technologies could support further outperformance among select countries.

Following a dramatic shift in interest rate expectations during Q2, fixed income markets face a more uncertain path ahead. While elevated yields continue to offer attractive income opportunities, the direction of interest rates will largely depend on whether inflation begins to moderate in the coming months. If price pressures prove more persistent than expected, Treasury yields could move higher and create additional volatility across bond markets. At the same time, healthy corporate fundamentals and relatively low default expectations should continue to support higher-yielding sectors, including high-yield bonds and emerging market debt. Despite the prospect of continued rate volatility, today’s elevated starting yields position fixed income to generate attractive long-term returns while continuing to serve as an important source of portfolio diversification.

This information is for educational purposes and is the opinion of Aldrich Wealth LP (Aldrich Wealth). Facts and figures are believed to be from reliable sources, but no liability is accepted for any inaccuracies. Indices are unmanaged, unavailable for direct investment, and do not include any transaction, management, or other fees or costs. Nothing in this commentary should be construed as an investment recommendation. Forward-looking statements reflect current views and are not guarantees of future performance. Past performance does not guarantee future results. All investments involve risk. Aldrich Wealth is an investment adviser registered with the U.S. Securities and Exchange Commission.