Stocks bounced back in a big way in the second quarter. After sliding in the first quarter on concerns about conflict in the Middle East and questions about AI winners and losers, the S&P 500 rallied 15%—one of the strongest quarters in recent years. The index has now more than doubled since the start of 2023. That’s quite a run for investors!
Even better, this recent rally looks different from what we have seen over the past few years. The gains aren’t coming from just a handful of familiar tech names but instead from a much wider slice of the market. That broadening is the real story of the quarter.
More Than Magnificent
We spend a lot of time talking about the S&P 500 and for good reason. It is the largest, most-followed stock index made up of many of the biggest and most important companies you can invest in. If you hear someone say something like, “The market was up 10%,” they are almost always referring to the S&P.
And as important as each of those 500 companies is, just seven stocks nicknamed “The Magnificent 7” have dominated the S&P 500’s returns over the past three years. These massive, well-known tech stocks—Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla—accounted for 63%, 55%, and 46% of the S&P 500’s annual returns over that time (2023, 2024, and 2025, respectively). In other words, this handful of stocks drove returns in recent years, but not so much in 2026.
Those seven stocks are underperforming in 2026. And yet, the S&P 500 has still given us a double-digit return because the other 493 stocks are driving the index higher.
Mid-cap, small-cap, and international stocks are all doing better, as well. Small-cap and emerging-market stocks, in particular, both more than doubled the returns of large-cap over the first half of 2026.
A big part of these gains can be explained by the evolving AI trade. Phase one of the AI boom benefited the stock prices of the leading AI chipmaker, Nvidia, and the huge tech companies spending the most to build AI data centers and develop AI tools (i.e., the Magnificent 7).
We have entered a new phase where investors are scrutinizing which companies actually benefit from the AI ramp-up. You could call it the “show me the money” phase. As a result, we’re starting to see some of the high-flyers from recent years falter while other areas are doing much better.
Seeing the current bull market broaden to benefit smaller companies and expand beyond the US border is a healthy development. We always say it is too hard to pick next year’s winners and instead advise our clients to invest a little bit in a lot of different things. Right now, leadership is coming from a much wider group of stocks, and owning a diversified portfolio is rewarding investors.
Better Than Most People Think
There is another reason many people may not realize markets are doing as well as they are. There is a bit of a disconnect between how people feel about the economy and how it is actually performing. It is easy to feel worried about how things are going right now. Gas prices are still higher than at the start of the year. The cost to feed a family skyrocketed during COVID, and food prices haven’t come back down. House prices and current mortgage rates make it nearly impossible for most people to move. It’s no surprise consumer sentiment is at its lowest levels since the University of Michigan began monthly tracking in 1978.
But are things really that bad? The current unemployment rate of 4.2% is lower than it has been for most of the past fifty years. The number of employed people in the US is at an all-time high, and nearly a million more new jobs are being posted today than there were in December.
US real GDP grew 2.1% in 2025, and most economists are projecting GDP to grow by about that same amount in 2026. That’s far from jaw-dropping, but it is in line with the average annual growth rate we have seen since 2010.
So what’s holding the economy up? A lot of it comes back to AI. While we think of it as a digital revolution happening in the cloud, AI is being built in the physical world. AI investment is going toward construction and manufacturing companies to build and outfit data centers, as well as new power plants to supply them. Strip out AI-related investment—which drove anywhere from 11% to nearly 40% of quarterly GDP growth in 2025, according to the St. Louis Fed—and this economy looks considerably softer, with recession concerns likely grabbing more attention.
None of this means the economy is working for everyone. Many households are struggling with higher costs and job displacement. That has always been the case. But maybe the economy is doing better overall than consumer sentiment implies. As long as we continue to see growth, things are headed in the right direction.
Follow the Earnings
When stocks are near all-time highs, as they are now, some investors start to get nervous, the way you might feel standing on top of a mountain, looking down. Can markets go higher over the second half of the year? Are we getting ready for a drop?
Of course, we never know for sure, but the best place we can look is where stock returns and the economy meet—corporate earnings. On that note, things are looking very, very good.
Coming into the year, expectations were for S&P 500 earnings to grow about 15% in 2026, which would be a good year by any measure. But after knockout first-quarter reports, estimates have jumped, and as of early July, earnings are now projected to grow 24%, according to FactSet. Now that would be a great year for earnings!
Not to be outdone, 2026 earnings forecasts for small-cap companies in the Russell 2000 have jumped from 23% back in early January to 38%, according to LPL, which is a big reason why small-cap stocks have done even better than large-cap this year.
Optimistic with Guardrails
Impressive earnings growth may continue to support a broadening bull market, but there are definitely still risks to monitor. Inflation could reaccelerate, valuations could be too pricey, and AI investments may disappoint.
Of course, it’s the major risks you don’t see coming that usually have the largest impact. As mentioned above, stocks fell 9% earlier this year following missile and drone strikes throughout the Middle East. That wasn’t among the top risks we were talking about at the end of 2025.
Regardless of what the news brings, we expect to see dips and pullbacks in stock prices. Every bull market has always come with plenty of handwringing along the way. At least for now, the economy, and especially stock earnings, are trending in the right direction. Hopefully that keeps stock prices moving higher. And just in case it doesn’t, we will stay diversified, rebalance when appropriate, and stay prepared for whatever comes next.
This information is believed to be accurate at the time of publication but should not be used as specific investment or tax advice as opinions and legislation are subject to change. You should always consult your tax professional or other advisors before acting on the ideas presented here.
DST 1031 Exchanges for Investors Seeking Simplicity and Diversification
June 25, 2026America at 250 … Hot!—2nd Quarter 2026 Commentary
June 30, 2026Stocks bounced back in a big way in the second quarter. After sliding in the first quarter on concerns about conflict in the Middle East and questions about AI winners and losers, the S&P 500 rallied 15%—one of the strongest quarters in recent years. The index has now more than doubled since the start of 2023. That’s quite a run for investors!
Even better, this recent rally looks different from what we have seen over the past few years. The gains aren’t coming from just a handful of familiar tech names but instead from a much wider slice of the market. That broadening is the real story of the quarter.
More Than Magnificent
We spend a lot of time talking about the S&P 500 and for good reason. It is the largest, most-followed stock index made up of many of the biggest and most important companies you can invest in. If you hear someone say something like, “The market was up 10%,” they are almost always referring to the S&P.
And as important as each of those 500 companies is, just seven stocks nicknamed “The Magnificent 7” have dominated the S&P 500’s returns over the past three years. These massive, well-known tech stocks—Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla—accounted for 63%, 55%, and 46% of the S&P 500’s annual returns over that time (2023, 2024, and 2025, respectively). In other words, this handful of stocks drove returns in recent years, but not so much in 2026.
Those seven stocks are underperforming in 2026. And yet, the S&P 500 has still given us a double-digit return because the other 493 stocks are driving the index higher.
Mid-cap, small-cap, and international stocks are all doing better, as well. Small-cap and emerging-market stocks, in particular, both more than doubled the returns of large-cap over the first half of 2026.
A big part of these gains can be explained by the evolving AI trade. Phase one of the AI boom benefited the stock prices of the leading AI chipmaker, Nvidia, and the huge tech companies spending the most to build AI data centers and develop AI tools (i.e., the Magnificent 7).
We have entered a new phase where investors are scrutinizing which companies actually benefit from the AI ramp-up. You could call it the “show me the money” phase. As a result, we’re starting to see some of the high-flyers from recent years falter while other areas are doing much better.
Seeing the current bull market broaden to benefit smaller companies and expand beyond the US border is a healthy development. We always say it is too hard to pick next year’s winners and instead advise our clients to invest a little bit in a lot of different things. Right now, leadership is coming from a much wider group of stocks, and owning a diversified portfolio is rewarding investors.
Better Than Most People Think
There is another reason many people may not realize markets are doing as well as they are. There is a bit of a disconnect between how people feel about the economy and how it is actually performing. It is easy to feel worried about how things are going right now. Gas prices are still higher than at the start of the year. The cost to feed a family skyrocketed during COVID, and food prices haven’t come back down. House prices and current mortgage rates make it nearly impossible for most people to move. It’s no surprise consumer sentiment is at its lowest levels since the University of Michigan began monthly tracking in 1978.
But are things really that bad? The current unemployment rate of 4.2% is lower than it has been for most of the past fifty years. The number of employed people in the US is at an all-time high, and nearly a million more new jobs are being posted today than there were in December.
US real GDP grew 2.1% in 2025, and most economists are projecting GDP to grow by about that same amount in 2026. That’s far from jaw-dropping, but it is in line with the average annual growth rate we have seen since 2010.
So what’s holding the economy up? A lot of it comes back to AI. While we think of it as a digital revolution happening in the cloud, AI is being built in the physical world. AI investment is going toward construction and manufacturing companies to build and outfit data centers, as well as new power plants to supply them. Strip out AI-related investment—which drove anywhere from 11% to nearly 40% of quarterly GDP growth in 2025, according to the St. Louis Fed—and this economy looks considerably softer, with recession concerns likely grabbing more attention.
None of this means the economy is working for everyone. Many households are struggling with higher costs and job displacement. That has always been the case. But maybe the economy is doing better overall than consumer sentiment implies. As long as we continue to see growth, things are headed in the right direction.
Follow the Earnings
When stocks are near all-time highs, as they are now, some investors start to get nervous, the way you might feel standing on top of a mountain, looking down. Can markets go higher over the second half of the year? Are we getting ready for a drop?
Of course, we never know for sure, but the best place we can look is where stock returns and the economy meet—corporate earnings. On that note, things are looking very, very good.
Coming into the year, expectations were for S&P 500 earnings to grow about 15% in 2026, which would be a good year by any measure. But after knockout first-quarter reports, estimates have jumped, and as of early July, earnings are now projected to grow 24%, according to FactSet. Now that would be a great year for earnings!
Not to be outdone, 2026 earnings forecasts for small-cap companies in the Russell 2000 have jumped from 23% back in early January to 38%, according to LPL, which is a big reason why small-cap stocks have done even better than large-cap this year.
Optimistic with Guardrails
Impressive earnings growth may continue to support a broadening bull market, but there are definitely still risks to monitor. Inflation could reaccelerate, valuations could be too pricey, and AI investments may disappoint.
Of course, it’s the major risks you don’t see coming that usually have the largest impact. As mentioned above, stocks fell 9% earlier this year following missile and drone strikes throughout the Middle East. That wasn’t among the top risks we were talking about at the end of 2025.
Regardless of what the news brings, we expect to see dips and pullbacks in stock prices. Every bull market has always come with plenty of handwringing along the way. At least for now, the economy, and especially stock earnings, are trending in the right direction. Hopefully that keeps stock prices moving higher. And just in case it doesn’t, we will stay diversified, rebalance when appropriate, and stay prepared for whatever comes next.
This information is believed to be accurate at the time of publication but should not be used as specific investment or tax advice as opinions and legislation are subject to change. You should always consult your tax professional or other advisors before acting on the ideas presented here.
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