Domestic Equity Market Commentary – 2Q 2026

Following a difficult first quarter impacted by the US/Iran conflict, equity markets quickly put that in the rearview mirror with the fragile truce in place, registering their strongest quarter since 2020. The S&P 500 Index posted a gain of 15.2%, erasing Q1’s losses and pushing its first-half returns into double digits at 10.2%. The broad strength of the US economy provided the primary support for the market. Strength in the manufacturing and services sectors plus resilient consumer spending aided by a 30% decline in oil prices drove solid economic growth, with corporate profit growth exceeding 20% among large cap companies. But it was Information Technology (IT) that posted the most striking returns, gaining 31% and being the only sector to post a return higher than the overall Index. Beneficiaries of AI compute and capital spending within IT, most notably semiconductors, electronic equipment, communications equipment and hardware, provided the bulk of these gains, while even software managed to advance following its Q1 meltdown as a perceived AI loser. Energy, not surprisingly given the drop in oil prices, posted a mid-teens decline. Defensive Utilities and Consumer Staples sectors also lagged in the quarter.

The broadening of equity market returns continued down cap in the quarter, as the Russell 2000 Index advanced 21.5%, extending its year-to-date gain to 22.6%. IT was the top performer among small caps as well, gaining 56%. While there was broad strength across all IT industries, semiconductors stood out with a return of over 100%. Health Care and Industrials also posted impressive returns, with broad gains in the former driven by takeover activity and new drug approvals, and more narrow AI infrastructure-related industries benefiting the latter. Energy was the laggard among small cap stocks as well, with oil & gas production companies particularly weak. Style factors favored lower quality attributes, which is not uncommon in a strong market, with high beta, low ROE, and non-earners all performing strongly.

Large cap Growth stocks outperformed Value by nearly 3% in the quarter. Surprisingly, IT’s strength was heavily weighted toward Value names in semiconductors and hardware. But this was more than offset by weakness among other Value-heavy sectors such as Energy, Financials, and Consumer Staples. Year-to-date returns still favor Value, which has maintained a lead of nearly 11%. Among small cap stocks, Growth had a performance advantage of over 8% for the quarter, driven mostly by relative weakness among value-heavy sectors Energy, Financials, Utilities, and Real Estate. This erased most of Value’s year-to-date advantage, which now stands at less than 1%.

Little has changed since last quarter, although during the ceasefire with Iran at the end of the second quarter, investors were able to refocus on the long list of positives likely to impact markets and the economy into the second half of the year. Most noticeable is the broad strength in nearly all economic indicators. The labor market remains steady despite earlier concerns about AI-related job losses. ISM survey data continues to show expansion in both the services and manufacturing economies. The Manufacturing survey has now put up an impressive six-month streak of favorable readings, no doubt helped by both tax breaks and the AI infrastructure buildout. And despite worrisome consumer confidence surveys, consumer spending remains quite resilient, and should have a tailwind from the meaningful drop in oil prices. Earnings growth also remains very strong, with expectations of growth in 2026 of over 20% for large cap companies and mid-teens for smaller companies.

While the list of concerns is not particularly long, inflation remains stubbornly high, prompting a more hawkish Fed and keeping interest rates elevated, which could weigh on stock valuations. There are also growing challenges to the AI investment theme, most notably declining free cash flows by the hyperscalers and uncertainty as to the timing and magnitude of returns on these massive investments. Lastly, while the Middle East truce remains in effect, there is a lot of work that still needs to be done before we can say with confidence that renewed escalation is unlikely.

While today’s environment may feel especially uncertain given the new world of AI, quantum computing, drones, crypto, and alternative power — periods of disruption have historically created opportunities for long-term investors. Nothing in the current environment has changed our investment approach, which remains focused on identifying high-quality, well-managed, financially sound companies that create new markets, gain share within existing markets, or create sustainably high returns on capital. Our job is to separate the wheat from the chaff, which can be difficult when newer technologies are in their early stages of development, but we remain confident that our quality-oriented approach ultimately wins out as markets and companies mature.