6 min read
Performance
The second quarter of 2026 reinforced a familiar yet important market dynamic: equities continued to advance despite an increasingly complex macroeconomic backdrop. Markets entered April with strong momentum, supported by resilient corporate earnings and sustained investment, particularly in technology and AI-related infrastructure. While broad market conditions appeared constructive, inflation began to reaccelerate, driven in part by geopolitical developments that introduced new layers of uncertainty, influencing both investor sentiment and policy expectations.
By May, this tension came into greater focus. Earnings outcomes remained broadly favorable, with many companies exceeding expectations, but market leadership thinned as gains became increasingly concentrated within a smaller group of large-cap technology companies, particularly semiconductor producers. At the same time, economic data presented a mixed picture. Labor markets remained stable, but consumer sentiment softened and inflation climbed to a three-year high.
Focus shifted more decisively to monetary policy in June. At the Federal Reserve’s June 17 meeting, the first with new Chair Kevin Warsh at the helm, the Fed held rates steady for a fourth consecutive time and adopted a more hawkish tone. Policymakers also revised their economic projections to reflect more persistent inflation, tempering expectations for near-term easing. Notably, the meeting also marked an early shift in the Fed’s communication approach, with Warsh signaling a move away from forward guidance and toward a more data-dependent framework in which market pricing and economic signals may play a larger role in shaping expectations.
Late in the quarter, geopolitical tensions eased following a preliminary agreement between the United States and Iran intended to end months of conflict and reopen the Strait of Hormuz. A memorandum of understanding established a temporary ceasefire, lifted certain U.S. naval restrictions, and created a 60-day framework for negotiating a broader agreement, though key issues such as Iran’s nuclear program remain unresolved. While the announcement helped ease immediate supply concerns and contributed to a pullback in energy prices, developments in the final days of June highlighted the fragility of the arrangement, as questions surrounding implementation and maritime security illustrated that the path toward a lasting resolution remains unsettled.
Taken together, the quarter highlighted a market navigating competing forces. Strong earnings and economic resilience supported continued gains, while persistent inflation, evolving policy expectations, and geopolitical unease introduced bouts of volatility and contributed to narrower market leadership. The environment illustrated a key principle for long-term investors: markets can move higher even as conditions become more complex, underscoring the value of diversification and disciplined positioning.
Stocks
U.S. equities, as measured by the Russell 3000 Index, delivered strong gains during the second quarter, capping their best quarterly performance since 2020. Results were supported by continued earnings strength and sustained investment trends. Early in the quarter, cooling global tensions helped improve sentiment, while leadership rotated back toward technology and AI-linked companies as investment spending accelerated. Despite broad index gains across market capitalizations, performance varied across segments. By quarter-end, small-cap stocks (S&P SmallCap 600) led performance, followed by large-cap (S&P 500) and then mid-cap (S&P MidCap 400).
Factors are well-established drivers of risk and return, rooted in economic theory and observed across different markets and time periods. Factor leadership reversed in the second quarter, with momentum surging to the top, growth and quality both posting strong gains, and value lagging. Large-cap technology and AI-related leaders continued their climb, fueling momentum’s strength. Growth rebounded alongside improving earnings results and renewed confidence in long-term investment themes. Quality also delivered strong returns as investors continued to favor companies with durable earnings, healthy balance sheets, and resilient business models. Value lagged as investors tilted toward companies with stronger long-term growth prospects rather than those trading at lower valuations or perceived as relatively inexpensive.
Source: Planning Alternative, YCharts data
International equities (MSCI ACWI ex-U.S.) trailed U.S. markets overall, though underlying performance varied across regions. Emerging markets were a notable area of strength, supported by a weaker U.S. dollar and improving earnings trends that contributed to renewed investor demand for segments of the global market with higher growth potential. While developed international markets posted solid gains, they underperformed emerging markets due to a less favorable currency backdrop and more subdued economic momentum.
Within emerging markets, results varied. China diverged from many peers, as ongoing property-sector challenges, uneven domestic demand, and policy uncertainty weighed on performance and left it increasingly out of sync with the rest of the asset class. This divergence underscores the importance of selectivity within international allocations, even as non-U.S. exposure continues to offer diversification and exposure to different economic drivers.
Bonds
Fixed income markets experienced a volatile second quarter, with returns shaped largely by shifting expectations around monetary policy. After modest early gains, bonds sold off from mid-April through mid-May as inflation concerns led investors to reassess the outlook for interest rates. As the quarter progressed, conditions stabilized and bonds recovered, ultimately finishing in the green.
Performance within fixed income varied across the yield curve. Shorter-duration bonds (Bloomberg U.S. Government/Credit 1–5 Year Index) lagged, as a more pronounced increase in short-term yields weighed more heavily on the front end of the curve than on longer maturities. Municipal bonds were a bright spot, supported by continued demand for tax-exempt income and stable credit conditions, even as the broader asset class navigated mid-quarter volatility.
The Treasury yield curve remained positively sloped throughout the quarter and shifted higher across most maturities, reflecting a meaningful repricing of Fed policy expectations. Short- and intermediate-term yields saw the largest increases, while longer-dated yields moved more modestly. The Fed’s June projections reinforced this shift, with policymakers raising their inflation outlook and signaling a potential path for higher interest rates. As a result, higher yields across much of the curve increased borrowing costs and weighed on bond prices and other rate-sensitive assets.
Source: Planning Alternative, Treasury.gov
Alternatives
Alternative assets delivered mixed results during the second quarter, reflecting shifting conditions across commodity and real asset markets. Commodities declined after a strong start to the year, as improving geopolitical conditions helped ease supply concerns and reduced some of the pressures that had supported prices. Natural resource equities followed a similar pattern, declining alongside underlying commodity prices.
By contrast, global real estate emerged as a relative standout. Performance was supported by improving sentiment around property valuations and income generation following an extended period of repricing, even as policy expectations leaned toward a more restrictive path and inflation readings remained elevated. Real estate’s income-oriented characteristics helped anchor returns despite a still-challenging macro backdrop.
Source: Planning Alternative, YCharts data
Source: Planning Alternatives, YCharts data
Perspective
“Uncertainty is actually the friend of the buyer of long-term values.”– Warren Buffet
The second quarter served as a reminder that uncertainty is a permanent feature of investing, not an obstacle to long-term progress. Despite persistent geopolitical tension and a more opaque policy outlook, equities set new highs. New all-time highs are more common in bull markets than many investors assume, with several years over the past four decades registering 40, 50, and even 70-plus new highs for the S&P 500. As the chart below illustrates, 2026 has continued that pattern, with the index already notching 24 new highs through June. The takeaway: new highs are not a signal to fear, but rather a natural byproduct of a market that trends upward over time.
Looking ahead, the key question is how long markets can continue to absorb existing risks. A more hawkish policy stance, sticky inflation, and ongoing geopolitical instability create an environment where expectations may swing quickly. Should inflation remain elevated or growth slow, markets could see renewed volatility. Periods like this serve as a reminder that successful investing is less about predicting outcomes and more about preparing for a range of possibilities. Markets can and often do advance alongside uncertainty, reinforcing the importance of diversification, discipline, and maintaining exposure across multiple drivers of return.
Positioning
Portfolio positioning remained consistent throughout the second quarter, aligned with the adjustments implemented earlier in the year. We maintained our reallocation toward domestic large-cap momentum, developed international momentum, and emerging markets ex‑China, reflecting our consensus research views, which incorporate institutional third-party research and internal analysis.
Portfolios continue to hold a modest overweight to international equities relative to benchmark.
We favor this stance because international stocks continue to trade at lower valuations than U.S. stocks, earnings trends continue to strengthen, and the exposure adds diversification. We also maintained a measured tilt toward the momentum factor, which contributed positively during the quarter as prevailing market trends persisted. Within emerging markets, we continue to emphasize ex‑China exposure, consistent with our view that China-specific risks warrant a more selective approach.
Our focus remains on disciplined, research-driven decision-making rather than reacting to short-term market developments. Strategic asset allocation, diversification, and a long-term perspective continue to guide our process, keeping portfolios positioned to pursue opportunity while helping manage changing market conditions in pursuit of True Wealth for our clients.
Planning Alternatives is an investment advisory firm registered with the Securities and Exchange Commission (“SEC”). SEC registration does not imply a certain level of skill and or expertise. The information presented should not be construed as personalized investment, financial, legal or tax advice. It is limited to general information about our views on the economy, various investment options, and investment strategies. Planning Alternatives does not provide tax, legal or accounting advice. Before implementing any approaches presented you should consult your own tax, legal and accounting advisors before engaging in any transaction about the financial, legal and tax suitability for you.
References:
- Federal Reserve Board - Federal Reserve issues FOMC statement
- Federal Reserve holds interest rates steady and hints at rate hike later this year: NPR
- FOMC Summary of Economic Projections, June 2026 | FRED Blog
- Here's the inflation breakdown for May 2026 — in one chart
- Q2 2026 Investment Outlook | BII
- AI opportunity in international stocks | 2026 outlook | Fidelity
- China Macro Data Highlight Ongoing Cross-Sector Pressures
- Full text of Trump's framework agreement to end Iran war : NPR
- Trump's U.S.-Iran framework agreement, explained: NPR
- U.S. strikes multiple targets in Iran in response to tanker attack: NPR
