Second Quarter 2026 Market Commentary

Major Index Performance (Total Returns)

It was a blowout quarter for equities overall; there's no doubt about it. And get ready for a very repetitive story: dynamic RAM (DRAM) demand and AI data center construction. Well, DRAM demand for AI data center construction. Why did emerging markets do well? Why did the Nasdaq outperform the S&P 500? Why did the MSCI EAFE lag the other indices? DRAM and AI data center construction — or, in the last case, the lack thereof. So, apologies for the monotony in advance.

The MSCI Emerging Markets index led the way, appreciating 24.05% in Q2. This strong performance (and relative outperformance) was due to the index's heavier weighting toward the semiconductor industry. More specifically South Korea (through SK Hynix and Samsung) and Taiwan (through Taiwan Semiconductor Manufacturing Company) were the primary country attributors, appreciating 64.13% and 53.14% respectively.

Given what drove emerging market's strong performance, it’s probably not a surprise that the Nasdaq Composite had a strong quarter as well, appreciating 21.60%. As we know, the Nasdaq Composite has a heavier weighting towards the techier, growthier names, so when the tech sector performs well, the Nasdaq performs well. There was a little surprise however. It wasn’t the typical big tech names (e.g., Nvidia, Google, Microsoft) that drove the Nasdaq higher instead, companies like Sandisk (SNDK), Micron (MU), and Intel (INTC) which more than tripled this quarter alone, were the primary drivers of the index's strong Q2.

The Russell 2000 index, the benchmark for small cap companies, was the third best performing major equity index, rallying 21.49%. Although the rally in small caps was more broad than large caps — as financials, industrials, and healthcare were meaningful contributors to performance — the primary contributing factor for this quarter's strong performance was AI infrastructure spend. As we've discussed already, the major semiconductor manufacturing names have significantly rallied this year, so this has a few investors nervous about potential overvaluation. This led investors to think of the second-order beneficiaries of the massive spend that's going on, for instance companies that support the chip manufacturing process or are a part of the value chain for data center buildouts, such has network and connectivity providers and energy providers. A lot of these second-order beneficiaries are small companies that make up the Russell 2000 index whose stock prices haven't "mooned" already.

The S&P 500, the most widely followed large cap index, posted a 15.20% return in the second quarter. This was the strongest quarter the S&P 500 has had since the Q2 2020 rebound from the Covid crisis decline, when the index fell by more than 30%. This too, was driven by the booming semiconductor industry. To illustrate, the iShares Semiconductor ETF (SOXX), which started in July of 2001, had it's strongest quarter to date, posting an eyepopping 95.05% return this quarter. To put these returns in context, the ETF's second strongest performing quarter was in Q4 2001, when it generated a 38.69% return.

Next, the Dow Jones Industrial Average appreciated 13.38%. You would have thought that since they don’t have as much tech exposure that they would have performed much poorer than they did, however, there are other underlying themes that are driving other industries that don’t with “T” and end with “echnology.” Industrials, Financials, and Healthcare, which the Dow Jones has a heavier weight in versus the S&P 500, rallied 14.81%, 8.87%, and 8.69%, respectively (using the sector ETFs as an indicator).

Finally the MSCI EAFE, the primary international developed index, rose 10.82%. This was primarily attributable to strong performance coming out of Japan and their technology sector.

U.S. Sector Performance

AMD (AMD), Micron (MU), and Intel (INTC), were the top three contributors to the Tech sector’s eye watering performance from March to June, surging 185.56%, 241.67%, and 216.41% respectively. Together these three companies added roughly $2 trillion in market value this quarter.

The primary story has been a shift within the AI theme: the hyperscalers (the large companies investing heavily in infrastructure, primarily to develop AI models) versus the AI "enablers" (the companies supplying the infrastructure components those hyperscalers need). Investors are moving away from the software side of the AI business and instead following the money — the massive hyperscaler capex flowing into the physical infrastructure that underpins AI computation, rather than the companies building the models themselves. Smart, but if AI companies can't earn an adequate return on the software they're building, this will eventually hit the hardware side too.

Then on the other end of the spectrum, the energy sector exploded in the first quarter but has since cooled, with the sector declining 12.69% in Q2. This is almost entirely attributable to developments coming out of the the middle east and more specifically the Iran War, which started in February, but had since simmered throughout the second quarter. With West Texas Intermediate (WTI) sitting at $102.86/bbl at the end March, oil prices plummeted on the announcement of a two-week ceasefire on April 7^th. On the hopes that the conflict could be coming to an end soon, WTI oil prices fell from $114.58/bbl to $96.17/bbl, a 16.07% decline that same day. But, this proved short lived, as there has been on again and off again agreements and violations of said agreements, whipsawed oil prices throughout. However, at the end of June, oil prices would settle at $70.56/bbl (down from $102.86/bbl) which is obviously going to have a direct impact on the energy sector’s profitability and earnings expectations going forward.

S&P 500 Top/Bottom Performers

Second Quarter

Year to Date

Sandisk (SNDK), Micron (MU), Intel (INTC), Marvell (MRVL), and AMD (AMD) – All About Massive AI Infrastructure Capex

As discussed previously, current and expected future infrastructure capital expenditures from the mega-cap technology names — the hyperscalers — were the dominant reason the top five performing stocks in the S&P 500 had such an extraordinary quarter. It isn't that their earnings releases justified these stocks more than tripling (outside of AMD, which is "only" up 185.56%). Rather, these chip and memory companies are a bottleneck for further data center buildouts and other AI hardware investment: they simply can't make chips fast enough to meet demand.

That puts the incumbent semiconductor players in a phenomenal position, for two reinforcing reasons. First, they have strong pricing power — if everyone wants what you have and you can't produce it fast enough, you're well positioned to push prices. Second, and underpinning the first point, the undersupply has allowed these companies to build a backlog, which gives investors a strong indicator of future revenue and profit growth. When you can raise prices and customers are willing to place orders for product well in advance, that's an extremely attractive business-wise. And what's good for business is good for stock prices.

Inuit (INTU) – Will AI Disrupt Quickbooks and TurboTax?

Intuit owns two of arguably the most recognizable business software applications in the United States: QuickBooks and TurboTax.

QuickBooks is a business bookkeeping application. You link your business accounts, and it aggregates and tracks your revenues, expenses, assets, and liabilities. It also handles basic financial reporting, producing an income statement, balance sheet, and statement of cash flows. Think of it as a personal finance app (like Credit Karma, which Intuit also owns) but for your business.

TurboTax is a basic tax preparation application. You upload your tax documents (like the W-2 you get from your employer each year), and TurboTax walks you through a series of questions to make sure your tax situation is captured accurately and you're claiming every break you're entitled to. Then it files your return with the IRS, and boom! You're done with taxes for the year.

QuickBooks charges a monthly fee; TurboTax charges per filing, priced by complexity. The brand strength of these two applications, combined with their predictable revenue streams, is what made the stock command a premium multiple. Intuit's five-year average P/E is 57.19x. After declining 39.44% for the quarter and 60.40% for the year, Intuit ended the quarter trading at a 15.80x multiple.

What happened? Well, AI happened. The fear is that AI-savvy software engineers will be able to build competitive applications that take market share from QuickBooks and TurboTax. To be fair, a five-year average P/E of 57.19x is rich, implying a lot of growth was already embedded in the stock price, so a correction was probably coming sooner or later. But will mom-and-pop businesses and non-tax-professional normies trust AI over the applications they've used for years? Ehhh.

International Indices

Developed Markets

Japanese markets posted a strong 11.05% this quarter. The reason for this strong performance is more of the same, semiconductor demand. Toyko Electron, which engages in the development, manufacture, and sale of semiconductor production equipment, which roughly doubled this quarter, was the largest contributor to the MSCI Japan index's performance.

The United Kingdom eeked out a 2.73% gain, so not terrible but lagging the MSCI EAFE index overall. The primary reason for the lag is because the country doesn’t have as much exposure to the technology sector and semiconductors specifically, so naturally it’s not going to perform as well when tech sentiment and spending accelerates. The index instead is more heavily weighted towards value sectors like, energy, banks, pharmaceuticals, and consumer staples. Speaking about energy in particular, since oil prices fell that’s obviously going to negatively impact the sector and therefore the relative overweight that the MSCI United Kingdom has.

Emerging Markets

It's getting repetitive, but can you guess why South Korea and Taiwan had booming quarters? Semiconductor demand. As mentioned in last quarter's commentary, South Korea is home to the two largest and most advanced high-bandwidth memory (HBM) producers, SK Hynix and Samsung. As in prior quarters, these two stocks were the dominant reason for South Korea's strong performance as SK Hynix rose approximately 228% and Samsung rose around 90% on a Korean Won basis.

Taiwan's index, meanwhile, is heavily tilted toward a single stock: Taiwan Semiconductor Manufacturing Company, the foundry the world relies on for chip manufacturing, which makes up roughly 55% of the index. TSMC rallied 41.64% in the second quarter. What put MSCI Taiwan over the top, however, were the country's other, lesser-known semiconductor names. MediaTek Inc., for instance, rallied 184.90%.

Brazil declined 9.27%, driven by weak commodity prices, oil in particular. Petrobras, a major oil and gas producer, is Brazil's largest publicly traded company and carries a meaningful weight in the MSCI Brazil index — so when oil prices fell during the quarter, Petrobras and the broader Brazilian economy felt it. Year to date, however, Brazil is up 9.63%, roughly on par with the S&P 500's ~10% return. So while it lags the MSCI Emerging Markets Index, it's performing admirably once you zoom out and put the number in context, particularly given the country's very low technology sector weighting.

U.S. Fixed Income

The Yield Curve

Yields could continue to rise across the curve with the most dramatic movements occurring in the 1-5 year range, similar to what occurred in the first quarter of the year. However, oil prices fell, so shouldn’t interest rates fall as well? Well, the bond market may be signaling that they’re more skeptical about the Iran War winding down., In addition, with inflation continuing to run hotter than what the Fed would like has led to expectations that the will Fed rate hike. It’s also worth noting that Kevin Warsh, who took over as the Chair of the Federal Reserve from Jerome Powell in May, has signaled that he is going to let the data drive interest rate decisions instead of political pressure. This came as a surprise, as many people (myself included) expected him to be politically influenced by Donald Trump, who has repeatedly stated that interest rates should be lowered.

The Credit Curve

The credit curve behaved as expected, given that US stock markets rose in the second quarter. Slightly below investment grade (i.e. BB and B) is where most of the credit curve tightened whereas issues of near perfect credit fell the least.

Fixed Income Fund Performance

Yields rising and credit spreads falling led to uneven fixed income performance. High yield and long-term corporate bonds performed the best and short-term and intermediate-term treasuries performed the worst. Intermediate term treasuries are the only segment with a negative return, which make sense given 1-5 year interest rates have risen the most this year. As a reminder, yields and prices move inversely — when yields rise, prices fall.

The U.S. Economy

The United States grew at a 2.07% annualized clip in the first quarter which is below their 2.68% year-over-year growth rate and well below the 3.00% long-term average. What's interesting about this quarter's growth rate is that it wasn't driven by personal consumption, which makes up approximately 66% of overall GDP. Instead, business investment and government expenditures were the primary US growth engines. The massive capital spend into artificial intelligence software and data centers were the primary attributors to business investment growth. The growth in government spending is a little misleading. Because yes, government spending grew however it came from the government reopening after being closed for much of the fourth quarter, when spending declined by an 5.77% annualized clip in Q4.

The unemployment rate fell .10% from the previous quarter and has ticked down from it's post-COVID high of 4.50% last November. However, the underlying story (like in the previous quarter) still remains the same. The labor force participation rate is falling. Meaning that a large portion of the US population has quit looking for a job altogether. In fact, the labor force participation rate is currently sitting at a 50-year low and has fallen sharply since the beginning of the year. This isn't the sign of a healthy economy, despite what the headline numbers at first glance may suggest.

While the annualized three month change seems more normal than what we've experienced recently, this too hides the underlying story. Inflation was incredibly volatile these past three months and it's primarily attributable to the "on again, off again" geopolitical tensions centered around the Iran War. In April, inflation was running at a 7.68% annualized clip and in May it was running at a 5.67% annualized rate. The May print was actually the highest year over year inflation rate the United States has experienced in the past three years. Then, due to geopolitical tensions easing and oil prices falling significantly, inflation fell 0.42% (-5.07% annualized) in June. Similar to the unemployment situation, the headline numbers don't tell the full story, and inflation being as volatile as it has been in the past three months doesn't point toward a health control of prices in the United States.

Q2 Quick Hits

• SpaceX ran the biggest IPO ever. Priced at $135/share on June 12, it raised $85.7 billion at a $1.77T valuation.

• The quarter's largest M&A deal was a power company merger, not a tech one. Dominion Energy–NextEra Energy at $66.8B topped the Q2 M&A table.

• Gold fell 14.2%. Gold gave back all its Q1 gains and closed June at $4,008/oz.

• Bitcoin fell ~10% and closed June near $60,000. This marks the third quarterly decline for crypto markets overall.

• Investor leverage is at an all-time high. FINRA margin debt rose from $1.22T at March 31 to $1.50T at June 30 — up 23.0% ($281B) in a single quarter and 49.0% year over year, an all-time high.

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