Markets finished the first half of 2026 with strong headline returns but a more complicated message beneath the surface. In fact, the second quarter of 2026 produced the strongest broad US equity advance since 2020, with the S&P 500 gaining 15.2%, the Nasdaq Composite up 21.6%, and the S&P SmallCap 600 up 19.7%. (Year-to-date gains were 10.2%, 13.1%, and 24%, respectively.)
Read on for in-depth discussions of the equity, fixed income, and international markets. This issue also features deep dives into the emerging multi-billion-dollar domestic nuclear sector and the core strategic benefits of private market allocations.
Macroeconomic Overview
The rebound was powered by resilient earnings, continued AI-related capital spending, and improving confidence that the Iran-related energy shock would not derail the expansion. At the same time, leadership remained uneven. Technology and semiconductors recovered sharply into quarter-end, but the volatility in June showed how sensitive crowded AI beneficiaries have become to valuation, guidance, interest rates, and capital-markets supply.
International markets also contributed positively, with emerging markets standing out as one of the strongest major equity areas. The MSCI Emerging Markets Index was up 24.1% for the quarter (24% YTD), helped by stronger earnings growth, attractive valuations, and participation in the global AI supply chain. Developed international equities (MSCI World ex US) also advanced 10.5% in 2Q26 and 9.6% YTD, but the case there remained more mixed as Europe and Japan are more exposed to imported energy costs, weaker productivity dynamics, and less compelling earnings growth than the US and leading emerging markets. US Dollar weakness remains a potential medium-term tailwind for non-US assets, though the firmer US interest rate backdrop late in 2Q26 argues against assuming a straight-line benefit.
Fixed income returns were modest by comparison. The benchmark Bloomberg Intermediate US Government/Credit Index was only slightly positive (0.43% in 2Q26 and 0.40% YTD), while intermediate investment grade corporates returned 0.98% and 0.75%, Treasury Inflation Protected Securities (TIPS), 0.89% and 1.2%, and high yield corporates, 2.5% and 2%. That pattern reflects the basic tension in the bond market: growth remained too resilient to produce meaningful total returns, while benign credit metrics allowed credit to continue to outperform. The June meeting of the Federal Reserve (Fed) reinforced that message. Policymakers held rates steady, but the updated economic projections were more hawkish, with inflation forecasts revised higher and the expected path of policy rates less supportive than markets had hoped.
Given the current backdrop, we remain modestly overweight equities and underweight fixed income. Within equities, we favor US large-cap quality due to earnings durability, pricing power, balance-sheet strength, and AI-related investment, but we’re getting increasingly selective rather than concentrated in the most crowded AI winners. We remain underweight small and mid caps because higher-for-longer rates and tighter financing conditions remain meaningful headwinds, despite improved breadth. We are overweight emerging markets, now including Latin America, as valuations, earnings growth, commodity leverage, and long-term dollar dynamics remain attractive, while we stay underweight developed international markets due to less compelling macro and earnings fundamentals. Within fixed income, we prefer selective credit risk over longer-duration rate-sensitive exposure, maintain high yield and emerging market overweights, hold TIPS as a core inflation hedge, and hold overall duration near neutral. Bottom line, our current posture remains constructive but not complacent: it is designed to participate if earnings strength and market breadth continue, while retaining inflation protection and balance-sheet quality if rates, oil, or credit conditions become less forgiving.
Equity Markets
The second quarter of 2026 proved to be a spectacular one for the stock market as it rebounded from its nadir on March 30. The S&P 500 Index returned a whopping 19.7% in just two months following that low as attention shifted from an oil price shock to the ongoing AI investment cycle. The 15.2% return for the S&P 500 this quarter was the strongest since the second quarter of 2020 when the market rebounded following the pandemic-induced panic that spring. These episodes of strong recoveries following an economic shock serve as a reminder for equity investors to focus on long-term corporate profitability rather than short-term disruption. To that end, it is encouraging to note that the rebound in equity markets has not occurred in isolation – projected earnings have ramped up alongside equity prices. Robust earnings growth keeps us optimistic on equities despite the recent runup, but we remain mindful of the unusually high level of concentration of both earnings and returns in the equity market.
Market concentration by sector increased noticeably during the second quarter as the technology sector nearly doubled the returns of the broad market, but security-specific concentration decreased as the so-called Magnificent 7 stocks struggled to keep pace with the market for the second consecutive quarter. As shown in the chart below, all of the Magnificent 7 stocks underperformed the S&P 500 in the first half of the year except for Alphabet (the parent company of Google) despite strong returns in the technology sector. Skepticism has been increasing around the return on investment that the large AI infrastructure companies (aka hyperscalers) will achieve with their ballooning capital expenditures. As a result, stock market leadership in the AI trade has been gradually transferred from the hyperscalers to their suppliers of networking equipment, servers, semiconductors, etc. These “picks and shovels” of the AI gold rush have been the place to be in 2026 as bottlenecks in the AI infrastructure supply chain have formed and the hyperscalers continue to invest aggressively to meet projected demand. The result is an unprecedented level of pricing power for suppliers of some components such as memory, which has historically been subject to incredible boom and bust cycles.
“It’s different this time” is a famously hazardous premise, and we expect to eventually see the typical cycle of confidence leading to over-confidence and malinvestment. For the moment, there are few signs of an end to the cycle, but headwinds continue to gather. The latest example is a wave of huge IPOs (SpaceX this quarter, likely followed by Anthropic, OpenAI, and others) and stock offerings from the hyperscalers that have been net purchasers of their own stock in the past. The IPOs are evidence of the incredible breadth and depth of private markets today and have also provided a one-time boost to overall corporate profits as some public companies are generating material nonoperating earnings from the appreciation of their positions in these companies. Most importantly though, in recent years stock buybacks have been a significant driver of overall earnings per share growth by reducing the number of outstanding shares. If this trend reverses such that shares outstanding steadily increases, share issuance could become a meaningful headwind for earnings per share growth and the overall equity market.
While we continue to see anecdotal evidence of speculative excess and problematic financing arrangements in the marketplace, the bottom line for the moment is a positive one. At the beginning of the year the S&P 500 was expected to generate earnings per share of $311 in 2026, a 13% increase from 2025 EPS of $273. Today the consensus earnings expectation for 2026 stands at $344/share – an incredible 26% jump from the prior year. This level of earnings growth is rare (and unsustainable) but attests to the impact of AI spending on the equity market outlook. The majority of that 26% earnings growth in the S&P 500 comes from the technology and communication services sectors. While there are many variables to consider in updating our equity market outlook, AI simply towers above all other factors for the moment. Over time we expect the excesses to be wrung out and the market to return to a more diverse and durable set of earnings drivers. In the meantime, we remain cautiously optimistic while maintaining our disciplined approach to risk management in these volatile equity markets.
International Equity
International equities shrugged off the oil shock and delivered a strong second-quarter rally, though headline returns masked wide regional dispersion. Developed international equities (MSCI World ex US) rose 10.5%, while MSCI Emerging Markets surged 24.1%, powered by countries directly linked to the global AI infrastructure buildout. The quarter was defined by two competing forces. On one side, the conflict in Iran drove an oil price shock that pressured energy-sensitive developed markets. On the other, accelerating investment in AI hardware, semiconductors, data centers, and power infrastructure created a powerful tailwind for emerging markets. A slightly stronger US Dollar, up 0.6%, added a modest currency headwind for US-based investors.
The Middle East conflict created the clearest headwind for developed international markets. Surging crude oil prices reignited concerns over inflation, consumer spending, and central bank policy. Europe was particularly vulnerable given its reliance on imported energy and its large manufacturing base. The German DAX Index rose 8.7% and France gained 9.3%, solid absolute returns but still below broader international market returns. Energy-sensitive industrial and cyclical companies remained under pressure as investors questioned the durability of Europe’s recovery. Japan was a relative bright spot, rising 14.2%, supported by ongoing corporate governance reform, improving shareholder returns, and its critical role in the global AI supply chain. By contrast, Hong Kong declined 6.2%, weighed down by heavy exposure to financials and real estate sectors, weak China-linked sentiment, and limited participation in the AI buildout trades.
Emerging markets outperformed again, with performance driven by a narrow but powerful group of AI-related markets. South Korea rallied 87.6% and Taiwan gained 49.0%, reflecting strong demand for AI semiconductors and related hardware. South Korea benefited from surging demand in high-bandwidth memory used in AI accelerators, while Taiwan remained central to advanced foundry and chip manufacturing. India also recovered, rising 10.2% after a weak start to the year, supported by a more stable rupee, accommodative monetary policy, and improving expectations for corporate margins. Performance elsewhere was more challenging. Latin America declined 3.4%, pressured by a stronger dollar, delayed monetary easing, and political uncertainty in Brazil. China fell 6.6%, as policy support and selected signs of stabilization were not enough to overcome weak consumer confidence, property-sector stress, industrial overcapacity, and geopolitical concerns.
Looking ahead, we remain positive on international equities, with a preference for Japan and select emerging markets. Europe could also rebound strongly if the reopening of the Strait of Hormuz proves durable and energy pressures continue to ease. Valuations outside the US remain compelling, earnings momentum is improving, and investors are increasingly seeking diversification beyond concentrated US mega-cap technology exposure. We favor high-quality companies with pricing power, strong balance sheets, and durable exposure to AI infrastructure, semiconductor supply chains, electrification, and defense modernization.
Key risks include renewed geopolitical escalation, further US Dollar strength, and a slower-than-expected recovery in China. We view the international opportunity set as attractively valued and supported by structural growth drivers rather than a simple cyclical rebound.
Fixed Income
In the second quarter, the conflict in Iran was the focus for fixed income investors, but Kevin Warsh’s first meeting as Chairman of the Federal Open Market Committee (FOMC) also captured the market’s attention. Fixed income investors have also closely watched credit markets for signs of economic stress and assessed the appetite of lenders to finance the AI buildout. Interest rates increased modestly in the quarter, driven by stable labor markets, AI-fueled economic growth, and a persistent inflationary impulse that was exacerbated by geopolitical conflict.
The Consumer Price Index (CPI) reached 4.2% in May, its highest level in three years, largely due to the lingering effects of higher oil prices. Even core inflation measures that strip out volatile energy prices, like the Personal Consumption Expenditure Core Price Index (Core PCE), are tracking above 3%. In his first meeting as Chairman of the FOMC, Kevin Warsh showed he is making inflation his primary focus, and used the June meeting to deliver a forceful, inflation-fighting message.
One of his strongest statements from the June 17th press conference was “Persistently high prices are a burden for the American people, but the recent past need not be prologue.” If the market views Warsh’s intent credibly, we expect to see slightly higher short-term interest rates and lower long-term interest rates.
Volatile energy prices, geopolitical conflict, and weakening consumer confidence have not been enough to derail global economies or dent credit quality either in the US or Europe. In the US, credit rating upgrades have outnumbered downgrades by a 5-to-1 margin year-to-date1. In Europe, that ratio is a robust 2-to-1. The strong balance sheets and robust cash flow profiles of corporate issuers are the major reasons that ratings continue to trend upward.
AI-related issuers have also needed to tap non-US bond markets aggressively and even indicated that they will issue equity to amass the required funding. Demand for these bonds has been stellar, but credit default swaps on many of these same companies have risen year-to-date, meaning perceived default risk is higher, even if only modestly so. While conditions remain broadly supportive, it shows that the market’s lending appetite may not be limitless.
If the Fed can make progress reducing inflation pressures, we see an increasing likelihood of lower Treasury rates in the second half of 2026, especially in 5- to 10-year maturities. In fixed income portfolios this makes us more inclined to extend portfolio duration slightly and lock in attractive yields. Credit markets remain healthy, but stretched valuations in many sectors mean that managing and monitoring risk is important. We still recommend diversifying risk with complementary asset classes such as securitized bonds, emerging debt, and high yield. Broadly, market yields remain attractive, which should help fixed income contribute meaningfully to portfolio returns going forward.
1: Bloomberg; S&P historical rating actions
Energy Transition
The long-anticipated nuclear renaissance is taking shape. Insatiable power demand, supportive tax and regulatory frameworks, the drive to decarbonize, and technology advancements are driving a new wave of nuclear development in the US. Nuclear generation, like geothermal, represents clean baseload power with a real potential to reduce the power sector’s carbon intensity and support future capacity growth.
Today’s nuclear technology landscape spans traditional large light-water reactors (LWRs), small modular reactors (SMRs), and micro-reactors. Traditional large LWRs use highly pressurized water for cooling, requiring containment domes and large cooling towers, and years of hard-to-scale construction. New entrants and incumbents have pivoted toward advanced approaches that address these engineering and safety challenges head on.
New advanced approaches are generally smaller in scale and use factory-built modular units, ranging from 50-300MW SMRs down to sub-20MW micro-reactors. GE Vernova, Hitachi, and Holtec make LWR SMRs with improved safety features; Oklo and TerraPower are developing sodium-cooled fast reactors that can use nuclear waste as fuel; and Kairos Power and X-energy offer molten salt and pressurized gas designs, which also produce high-temperature heat that can be sold to industrial customers. Micro-reactors from Westinghouse and Radiant are virtually meltdown-proof and fit in a shipping container, expanding use cases. Business models vary too: some (e.g., Oklo) build infrastructure and sell power, while others (e.g., X-energy) license designs and sell services, including fuel.
A 2025 executive order called for quadrupling US nuclear power capacity to 400GW, signaling the growth ahead. Financing infrastructure at this scale will require capital from many sources. Private venture capital has helped catalyze early R&D
and helped start-ups navigate licensing. VC fission funding totaled just over $3 billion over the 24 months to June 30, 2026, based on Bloomberg New Energy Finance (BNEF) data.
This early work has enabled larger funding deals and, importantly, power purchase agreements (PPAs) with hyperscalers intent on long-term decarbonization. Since late 2024, hyperscalers have announced PPAs and other commitments exceeding 10GW, representing tens of billions in long-term revenue. Oklo and X-energy have leveraged these relationships to enter public equity markets and raise additional capital.
Government policy and regulatory actions also support domestic development: the IRA created tax credit frameworks for nuclear power production, the OBBBA phased in restrictions on foreign sourcing, and the Nuclear Regulatory Commission has modernized regulations governing licensing, timelines, and fuel fabrication. Together, these actions have radically transformed the operating environment for new nuclear construction.
Despite the momentum, the industry must navigate real supply chain risks to reach scaled commercialization. Decades of limited development have left a limited, aging, skilled workforce, and most components for large LWRs, SMRs, and micro-reactors lack domestic suppliers. Fuel availability is a separate bottleneck: low-enriched uranium for LWRs is already tight, and most next-generation reactors need high-assay low-enriched uranium (HALEU), of which the US has just one demonstration-scale facility. Delays should be expected as the industry ramps back up.
The US is poised for a significant expansion in nuclear energy, with technology and design advancements meeting rising power demand, financial backing, and a supportive policy environment. Supply chain risks are real, but so are the power needs and decarbonization goals driving hyperscalers forward. With zero-carbon, baseload characteristics, we expect many years of growth ahead.
Alternative Assets
That divide has narrowed. For clients with the capital base and time horizon to support it, an allocation to private markets is increasingly useful for a well-constructed, diversified portfolio. The case for inclusion is robust and can be boiled down to 4 main points.
1. Illiquidity premium – This is expected incremental return to compensate investors for deploying capital into private markets less liquid than public markets. Liquidity in financial markets refers to how quickly and easily an asset can be bought or sold without causing a material change in its price. For an investor who can comfortably set aside a portion of capital they will not need in the near
term, that expected premium is, in effect, a potential available for allocating to less liquid assets.
2. Diversification benefit – Private equity, private credit, and real assets all exhibit low correlations in relation to the publicly-owned stocks and bonds already included in most client portfolios. Adding holdings with low correlation to traditional markets can improve the efficiency of the overall portfolio, dampening the swings that test investor discipline at exactly the wrong moments. The expected result is not merely higher potential return, but a steadier path toward it.
3. Broader opportunity set – The investable universe has shifted beneath investors’ feet. The number of US public companies has fallen by roughly half since the late 1990s, while the private universe has expanded. Companies now stay private far longer, raising abundant capital without going public and creating much of their value before an IPO. A portfolio allocated to private markets may open investors up to a much broader share of the economy and the businesses that comprise it.
4. Manager selection can add more value – In large-cap public equity markets, the gap between the best and worst managers is narrower than in private markets over the last 10 years. The dispersion between top- and bottom-quartile managers in private equity markets is wide, more than ten percentage points of annual return, a gap that simply does not exist at that scale in large-cap public equity strategies. This does, however, cut both ways. It raises the stakes of manager selection and access, but it also means that disciplined diligence and entry to the right funds can add real, durable value.
None of this makes private markets a free lunch. Ability and willingness to take illiquidity risk is genuine and positions must be sized thoughtfully. If an investor is comfortable with that, the diversification benefits are material, as is the access to the broader opportunity set of companies. That said, dispersion amongst investment managers rewards good selection and punishes poor selection in equal measure, giving expertise an elevated level of importance. Private markets demand patience, thoughtful construction, and the ability to find and secure access to quality managers. For investors comfortable with the risks, private markets warrant consideration as a core, strategic allocation.