SFO 2nd Quarter 2026 Update
July 3, 2026
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Stocks Notch New Records in Q2 Amid the AI Boom, Despite Middle East Tensions
KEY TAKEAWAYS
The S&P 500 rallied nearly 15% in Q2, overcoming geopolitical turmoil, as AI stocks powered parts of the market to all-time highs.
Leadership broadened beyond the Magnificent Seven, with legacy semiconductors and small caps posting standout gains.
Looking ahead, elevated valuations and ambitious AI earnings expectations could make the second half more dependent on corporate execution than market momentum.
Another lightning-fast recovery in the stock market.
That sums up Q2, as the S&P 500 notched a late-March low of 6317 before surging to new all-time highs above 7600 by early June. A collective stumble by the Magnificent Seven (the mega-cap technology leaders: NVIDIA, Apple, Microsoft, Alphabet, Amazon, Meta, and Tesla) tempered the rally as mid-year approached, but equities posted a solid finish during the holiday-shortened trading week ahead of America 250.
All told, the S&P 500 gained 14.9% in the second quarter, powered primarily by tech stocks. The Information Technology sector tallied a 32% advance, its best quarterly ascent since Q4 2001. Within tech, the semiconductor industry set a new record, rallying nearly 90% from April through June. Unlike previous bull runs, though, it wasn’t the likes of NVIDIA, Apple, Microsoft, or Alphabet that led the charge. Instead, Dot-Com-era leaders such as SanDisk, Micron, and Intel stunned investors.
Chart Courtesy of Stockcharts.com
The latest twist in the AI-fueled bull market was the major catalyst, but Q2 was also a story of how unpredictable geopolitics can be. Step back in time to late March, and the economic situation might have felt dire. U.S. and global oil prices were soaring, prices at the pump ticked above $4 per gallon, and rising inflation spooked consumers as much as policymakers at the Fed. As it turned out, the end of Q1 was not the end of the world, but yet another buying opportunity.
Source: AAA
Markets quickly moved past U.S.-Iran war headlines and the back-and-forth between the Trump administration and Iranian leaders. Oil peaked at $120 per barrel in April, then caught nearly every macro expert off guard by plunging to $70 by the end of June. Of course, commuters still wait for gas prices to dip back to pre-war levels.
Source: TradingView
The first half of the year was another example of how trying to time markets (especially oil) is next to impossible. Pre-war, had we polled a group of oil industry analysts on the price impact of an effective multi-month closure of the Strait of Hormuz, it’s likely the responses would have called for “black gold” to climb to $150 or even $200 per barrel.
That worst-case scenario played out in the Middle East to an extent, but not on trading screens. Ironically, oil’s collapse occurred as the situation in the Strait turned worse. To this day, the region is far from peaceful, yet oil volatility has cooled, and prices are back to where they were in February before the first bomb dropped.
If that series of macro events sounds familiar, it should. It was a year ago when the trade war sparked a sharp selloff (just shy of a 20% decline, the traditional definition of a bear market) and a violent snapback. Volatility spiked, while news headlines pointed to a potential recession (or worse) due to economic policy. Fears of empty store shelves and another bout of harmful inflation permeated from Wall Street to Main Street.
Stocks had other ideas. Less than a week after President Trump unveiled tariff-rate boards in the White House Rose Garden, the S&P 500 bottomed. Many pundits felt another shoe would drop in markets, but it didn’t happen. Investors who stayed the course, stuck to their plans, and tuned out the alarming headlines fared the best.
Neither the trade war nor the conflict in Iran is truly over, but new themes are top of mind in markets today. Namely, AI. The artificial intelligence mega-trend is global. The second quarter saw South Korean and Taiwanese stock prices surge nearly straight up, while legacy tech companies at home finally surpassed highs that had stood since the late 1990s and early 2000s. Leadership indeed transitioned from the mega-caps and the Magnificent Seven to other still-large chipmakers, primarily memory/storage semiconductor companies.
Source: Opening Bell Daily, The Daily Shot
The cost of compute has taken off, driving inflation for AI inputs at the wholesale level all the way down to PCs and laptops, just in time for the back-to-school shopping season. The so-called “AI hyperscalers” (Microsoft, Amazon, Meta, Alphabet, Oracle, and now SpaceX) continue investing heavily in projects that use those chips. This form of capital expenditure is the durable engine of the bull market that began in October 2022. It’s why S&P 500 earnings-per-share growth has outpaced even Wall Street’s most bullish predictions, and U.S. manufacturing appears to be turning the corner.
With all this spending tied to the AI arms race, several questions come to mind: Is it too much of a good thing? Will the returns on investment pan out? Is that part of the market a bubble? If history is a guide, there will be companies left holding the proverbial bag, and aggressive capital allocation decisions made today will, at some point, appear foolish. As with the war and oil prices, though, timing it right is a fool’s errand. For now, tech leadership continues in the U.S. market and internationally, and S&P 500 earnings keep surprising to the upside.
Source: FactSet
We believe the second half of 2026 will be a “show-me” story for the stock market. The current price-to-earnings ratio of U.S. large caps is about 20x, meaning investors are paying roughly $20 today for every $1 of expected annual earnings. That is above the 10-year average, but actually quite close to the 5-year average.
But it’s the “E” in the P/E multiple that might be worrisome. Analysts have clearly priced in intense profit gains driven by hundreds of billions of dollars in AI spending. In short, the 10% first-half gain might not duplicate itself between now and December.
Source: FactSet
We are encouraged by more diverse leadership across the equity spectrum. The Russell 2000 Index of small caps posted its best first half of a year since 1991, ending June at an all-time high and up nearly 75% from its April 2025 bottom. Mid-caps, meanwhile, were up 17% from January through June, and the S&P 500 Equal Weight ETF printed one record after another as the S&P 500 Index wobbled from mid-May to quarter-end. Even the Dow Jones Industrial Average (of which Alphabet shares are now a part) has never been higher.
This broadening-out feature is a good thing, and by no means are “just seven stocks” leading markets these days.
Source: Augur Infinity
The Health Care sector actually led the way in June, along with Industrials. Shares of Eli Lilly joined the $1 trillion market-cap club, becoming a quiet market leader amid the AI excitement. It was certainly helped by the decision to include GLP-1 weight-loss drugs as Medicare-eligible (for just $50 per month for those who qualify).
The policy move should remind people (not just investors) that pharmaceutical breakthroughs happen every day; the problem is that the media rarely focuses on good news. Technology, including AI, helps experts meet long-term societal challenges, and it’s something to be optimistic about. We call that out because consumer sentiment still hovers near all-time lows.
Investors are hardly glum about newly public companies, however. Recent IPOs (initial public offerings, when companies first sell shares to the public) were the best-performing group in the entire market in Q2, and SpaceX’s debut contributed to the excitement. Elon Musk’s more-than-$2-trillion company (by market value) indicates the level of risk some speculators are willing to take.
An IPO frenzy could break out in the back half of the year, depending on the health of capital markets. Bankers are standing by to underwrite new go-public candidates, and we will be watching how that plays out.
Source: Koyfin Charts
The Fed is watching, too. Chair Kevin Warsh succeeded now-Governor Jerome Powell, whose term as chair ended May 15 (Warsh was sworn in a week later). At his first Federal Open Market Committee (FOMC) press conference on June 17, the attorney and former governor was short and sweet. The FOMC statement was a mere 130 words, less than half the length of the March release. Warsh’s post-decision media Q&A was also about 15 minutes shorter than Powell’s typical conference. The new Fed chief seeks a more streamlined and less talkative FOMC. But while he may be a man of fewer words than his predecessor, Warsh was clear that taming inflation is priority number one.
The bond market’s response was mixed. Short-term Treasury rates rose, while longer-term rates fell. It was actually an encouraging market reaction, suggesting stabilization rather than a rush toward aggressive rate increases. For investors, bond market volatility has dipped, interest rate hikes could be on the horizon, and inflation expectations have sharply retreated. What’s more, Fed Chair Warsh assured the market that Fed independence will continue unabated. Good news on that front.
Chart Courtesy of Stockcharts.com
Stocks begin the second half on their front foot. The S&P 500 lost fractional ground in June, but other areas picked up the slack, all while the bond market breathed a sigh of relief after Warsh’s first meeting at the Fed helm. Oil prices fooled the experts; the AI mega-trend rolls on; and earnings growth is nothing short of remarkable. Eyes now turn to the Q2 earnings season and, eventually, the midterms.
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As we head into the 4th of July weekend, Greg and Doug Stokes take a moment to express their gratitude and pride as Americans. They look at Meta following SpaceX’s data center strategy, the healthy broadening of the market, and why the U.S. offers an unparalleled risk capital environment, fueling innovation and economic growth.
*Stokes Family Office does not offer legal or tax advice. Please consult the appropriate professional regarding your individual circumstances.
