The second quarter of 2026 was defined by a familiar but difficult tension: markets faced real uncertainty, yet investors continued to find reasons to take risk. Geopolitical risk pushed inflation and rate concerns higher, while strong earnings and resilient employment supported confidence. Technology leadership remained powerful, although expectations became harder to satisfy, and international markets continued to remind investors that leadership does not always have to come from the same narrow group of U.S. companies.
Geopolitical Risk and the Energy Channel
The Iran conflict remained one of the quarter’s dominant market drivers. Early in the quarter, investors focused on whether the conflict could disrupt oil flows through the Strait of Hormuz, a key global shipping route for energy. When that route is threatened, the concern is not only the current price of oil. It is also the potential ripple effect through inflation, interest rates, consumer spending, transportation costs, and corporate margins.
Markets reacted quickly to each shift in the conflict. Reports of ceasefires or progress toward negotiations helped equities rally; oil prices ease, and interest rates move lower. When talks stalled or shipping concerns returned, volatility picked back up.
Our view is that geopolitical shocks are a reminder of why portfolio construction matters. These events are difficult to predict, but portfolios can be prepared for them. Diversification, liquidity, alternative strategies, and disciplined rebalancing are designed to keep a portfolio from becoming overly dependent on one outcome, one asset class, or one news event.
Markets Recovered Before the News Felt Settled
One of the more notable features of the quarter was how quickly equity markets recovered from earlier weakness. Even with the Middle East conflict unresolved, U.S. equities rebounded sharply, and the S&P 500 moved back toward record levels aided by a stronger than expected earnings season. In aggregate, S&P 500 earnings per share rose by 18% year over year, and the median stock increased earnings by 14%, one of the strongest quarters in a decade.
Investors were not ignoring geopolitical risk. They were balancing it against evidence that corporate profits remained resilient.
This is often uncomfortable because markets can recover before the world feels more stable. Investors tend to reprice expectations before clarity arrives. By the time the news feels resolved, much of the market move may already have occurred.
That does not mean every rally should be trusted without question. It does mean that waiting for certainty can be costly. The quarter reinforced the importance of staying invested according to a plan, rather than trying to move in and out based on headlines.
Interest Rates Remained a Central Force
Interest rates were another major story. The 10-year Treasury yield moved from roughly 3.95% near the end of February to just below 4.4% in June. That was a significant move, reflecting renewed concern around inflation and inflation expectations.
Higher rates influence mortgage costs and other borrowing costs, equity valuations, business investment, and the relative attractiveness of different asset classes. When rates rise quickly, both stocks and bonds can feel pressure at the same time.
The Federal Reserve’s job also became more complicated. Inflation remained above target, and the energy shock created the possibility that price pressures could remain sticky. The Fed’s June projections showed inflation still above its long-term target and the federal funds rate expected to remain elevated by year-end.
That mix limits how quickly the Fed can move. Higher inflation argues for patience, and possibly even an interest rate hike. This quarter, the data did not provide a clean answer.
For portfolios, higher rates create opportunity as well as risk. As longer-term yields moved into a more attractive range, adding duration exposure became more compelling. If rates later decline because inflation expectations cool or geopolitical pressure eases, that exposure can help the low-volatility side of portfolios.
A Strong Labor Market Cut Both Ways
The labor market remained firmer than expected. March job growth surprised to the upside, and the May jobs report was especially strong, with job creation well above expectations and upward revisions to prior months. Unemployment held around 4.3%, and job openings again moved above the number of unemployed workers.
For the economy, that is a positive signal. A healthy labor market supports consumer spending and reduces the likelihood of a near-term downturn. For interest rates, the implications are more complicated. Strong employment can keep the Fed on hold longer, especially if inflation remains above target.
That is one reason markets reacted unevenly to economic data during the quarter. At times, good news supported earnings and growth. At other times, good news pushed rates higher because it reduced the case for Fed easing. We expect that tension to continue until the inflation trend becomes clearer.
AI & SpaceX: Impactful Themes, Higher Bars
Artificial intelligence remained a dominant investment theme, but the quarter also showed that the market’s expectations are rising as late in the quarter, semiconductors sold off after results that were solid, but not strong enough for a market priced for perfection.
The initial public offering of SpaceX was historic in size and immediately placed the company among the largest public companies in the world. For clients, the investment question is not whether SpaceX is an exciting company, it is. The question is how much exposure is appropriate, how quickly to build it, what fair value is, and how that exposure fits with the rest of the portfolio.
The same discipline applies to AI more broadly. The theme remains powerful, but high expectations can create sharp reactions.
International Markets Continued to Participate
International equities continued to perform well during the quarter, helped by stronger local market performance. World ex-U.S. equities extended their year-to-date lead at points during the quarter, an important reminder after years of U.S. large-cap growth dominance.
This supports the case for global diversification. When international markets participate, diversified portfolios can benefit from sources of return outside the narrow group of companies that have led much of the recent U.S. market cycle. We continued to look for opportunities to improve foreign and emerging market exposure where valuations and momentum appeared attractive.
Looking Ahead
As we move into the next quarter, markets will likely focus on four questions: Does the Iran conflict continue to de-escalate? Do earnings remain strong enough to support equity valuations? Does the labor market stay firm without adding to inflation pressure? And how does the Fed balance inflation risk against the desire to avoid unnecessary pressure on growth?
The second quarter showed that markets can recover before the headlines are settled. It also showed why discipline is so important. Investors who wait for certainty can miss the adjustment, while investors who chase every move risk overreacting. Our approach remains centered on structure, patience, and using changing conditions to keep portfolios aligned with each client’s long-term plan.