In this latest installment of our newsletter, we share our observations of the markets and the economy in the second quarter of 2026. Click here to go to the full July 2026 report on our website. Following are the highlights:
- Equity markets rebounded strongly in the second quarter ended June 30, 2026, after their sharp sell-off in March tied to the start of the U.S. – Iran War.
- Markets pushed higher in Q2 despite a series of daunting world events – including the escalation of tensions with Iran and throughout the Middle East, an historic oil shock tied to the closing of the Strait of Hormuz, as well as concerns about higher-for-longer inflation and interest rates, and lingering questions around a potential AI bubble.
- The S&P 500 Index, the broadest measure of the U.S. equity market, posted a total return of 15.2% in Q2, its best second quarter performance since 2020. It also reversed the negative total return in Q1, which was driven by the sharp sell-off in March. For the year-to-date period ending June 30th, the S&P 500 index returned 10.2%.
- Within the S&P 500 Index, 9 of the 11 industry sectors generated positive returns in the second quarter, while only two posted negative returns. Technology stocks reclaimed the top position in terms of quarterly outperformance, returning 31.8% in Q2, driven largely by surges in semiconductor chip makers and other beneficiaries of AI-related spending. However, other sectors like industrials, financials, and healthcare also posted strong returns, as the market continued to broaden beyond the Magnificent 7 technology behemoths.
- Many investors have been asking the question, “How does the stock market keep hitting new highs when the world seems to be filled with so much turmoil?” To answer that question, we need to look at corporate earnings.
- Right now, corporate earnings are on a tear. They have been growing at double-digit rates for the last three years and are showing no signs of slowing down. The growth is partially explained by the many companies benefiting from massive AI spending, but it’s not actually all tied to AI. Other sectors including energy, communications services, and materials have also seen significant earnings growth so far in 2026.
- We believe that strong corporate fundamentals, which include earnings growth, revenue expansion, and balance sheet strength, provide the underpinnings for positive, sustainable market returns over the long term.
- Artificial Intelligence and its massive capital expenditures continue to be a defining force in the global economic landscape. A multi-year capex cycle is underway across data centers, power generation, and chip manufacturing, with more than $5 trillion projected to be spent through 2030.
- Elsewhere in the economy, U.S GDP growth remains positive, consumer spending has shown remarkable resilience, and the labor market is slow but stable. Overall, these positive factors suggest slow but steady economic growth, with little near-term risk of recession in the U.S. economy.
- Of course, the U.S. and global economies do face several economic headwinds which could delay or derail near-term growth. The most concerning issue is inflation, which has evolved meaningfully since the start of the year and is impacting almost every sector of the economy.
- Higher inflation has also meant higher interest rates. At the beginning of 2026, investors expected the Federal Reserve to cut interest rates during the year. But that expectation changed with the inflation pressures brought on by the Mideast war, and the markets are now pricing in a higher-for-longer interest rate environment. Higher sustained interest rates tend to undermine economic growth.
- Although we expect volatility to continue until there is more clarity around the war in the Middle East, the direction of inflation and interest rates, and the outcome of the midterm elections, we remain optimistic about the longer-term prospects for the U.S. economy and the stock market.
- Our long-term investment philosophy continues to favor value-oriented, dividend-paying stocks and other securities of companies that have strong revenue and cash flow characteristics, leading market shares, wide economic moats, and solid growth prospects.
- We believe our active approach to individual security selection leads to broadly diversified portfolios across industries, market capitalizations, and geographies, allowing our client portfolios to weather market turmoil and be well-positioned for long-term growth and appreciation.
The Edgemoor Team
