Second Quarter 2026 Economic & Market Commentary
Stocks staged a strong recovery in the second quarter, with the S&P 500 finishing near record highs. The Middle East conflict and oil shock that began in the first quarter continued for most of the second quarter, but oil prices fell as the two sides worked toward a ceasefire agreement.
Meanwhile, investors’ enthusiasm for artificial intelligence (AI) stocks returned, fueling a rally in semiconductor stocks. As companies reported strong first quarter earnings, the gains broadened beyond technology to include mid- and small-cap stocks. Even as stocks rallied, market conditions continued to evolve. The spring rise in oil prices lifted inflation to a three-year high, and the Federal Reserve signaled a shift from rate cuts to rate hikes.
Oil Prices Return to Pre-Conflict Levels
The energy shock that started in the first quarter unwound almost as fast as it arrived. Oil peaked near $115 in early April as the Middle East conflict closed the Strait of Hormuz, disrupting global oil supply. Energy prices remained volatile throughout the quarter, but oil ended the second quarter near $70, returning to where it traded when the conflict began.
The decline followed a ceasefire between the U.S. and Iran and expectations for the Strait, which carries nearly 20% of the world’s oil, to reopen. Gas prices followed the same path, rising sharply during the spring before falling late in the second quarter.
The reversal in oil prices is important, as energy prices feed directly into inflation, which in turn shapes the outlook for interest rates. When oil spiked earlier this year, inflation followed. Consumer prices rose 4.2% year-over-year in May, the highest in three years, with over half of the monthly increase tied to energy. Excluding energy, the underlying rate was 2.9%, an indication that the rise in inflation was driven by oil rather than broad price pressures.
The oil price spiking and the subsequent rise in inflation reshaped the interest rate outlook. Coming into this year, the market expected the Federal Reserve to cut interest rates two or three times in 2026. During the second quarter, the market switched from expecting rate cuts to pricing in a rate hike this fall.
The Federal Reserve held interest rates steady at both of its meetings during the second quarter, but it leaned toward the market’s view, signaling that its next move could be up rather than down.
The May inflation reading is backward-looking, so it captures oil near its peak rather than where it sits today. With oil back at pre-conflict levels, the main driver of higher inflation has started to fade, and inflation is expected to ease in the months ahead.
What stands out for the full quarter is how the market responded to the geopolitical events. There were stretches of volatility as the conflict dominated headlines in the spring, but stocks moved past them and finished the second quarter higher.
AI Spending Fuels Semiconductor Stock Rally
Semiconductor stocks led the market’s advance, posting their strongest quarter in nearly 30 years. This rally is anchored to a wave of technology investment, with much of the money flowing to the chipmakers. The pace of investment continues to climb: the top five companies are projected to spend about $724 billion this year and nearly $900 billion next year. The capital expenditures pay for data centers, the computer chips inside them, and the equipment and power to run it all. The companies leading the buildout are reporting record earnings and growing backlogs, and many say they’re limited more by how fast they can build than by demand.
The surge in spending is also reshaping financial markets. Private companies are going public to fund their spending, while public companies are turning to debt and equity markets to finance their buildout.
Want to read more? Click below to download our entire Quarter 2 2026 Economic & Market Commentary…
Q2 2026 Market Commentary
Second Quarter 2026 Economic & Market Commentary
Stocks staged a strong recovery in the second quarter, with the S&P 500 finishing near record highs. The Middle East conflict and oil shock that began in the first quarter continued for most of the second quarter, but oil prices fell as the two sides worked toward a ceasefire agreement.
Meanwhile, investors’ enthusiasm for artificial intelligence (AI) stocks returned, fueling a rally in semiconductor stocks. As companies reported strong first quarter earnings, the gains broadened beyond technology to include mid- and small-cap stocks. Even as stocks rallied, market conditions continued to evolve. The spring rise in oil prices lifted inflation to a three-year high, and the Federal Reserve signaled a shift from rate cuts to rate hikes.
Oil Prices Return to Pre-Conflict Levels
The energy shock that started in the first quarter unwound almost as fast as it arrived. Oil peaked near $115 in early April as the Middle East conflict closed the Strait of Hormuz, disrupting global oil supply. Energy prices remained volatile throughout the quarter, but oil ended the second quarter near $70, returning to where it traded when the conflict began.
The decline followed a ceasefire between the U.S. and Iran and expectations for the Strait, which carries nearly 20% of the world’s oil, to reopen. Gas prices followed the same path, rising sharply during the spring before falling late in the second quarter.
The reversal in oil prices is important, as energy prices feed directly into inflation, which in turn shapes the outlook for interest rates. When oil spiked earlier this year, inflation followed. Consumer prices rose 4.2% year-over-year in May, the highest in three years, with over half of the monthly increase tied to energy. Excluding energy, the underlying rate was 2.9%, an indication that the rise in inflation was driven by oil rather than broad price pressures.
The oil price spiking and the subsequent rise in inflation reshaped the interest rate outlook. Coming into this year, the market expected the Federal Reserve to cut interest rates two or three times in 2026. During the second quarter, the market switched from expecting rate cuts to pricing in a rate hike this fall.
The Federal Reserve held interest rates steady at both of its meetings during the second quarter, but it leaned toward the market’s view, signaling that its next move could be up rather than down.
The May inflation reading is backward-looking, so it captures oil near its peak rather than where it sits today. With oil back at pre-conflict levels, the main driver of higher inflation has started to fade, and inflation is expected to ease in the months ahead.
What stands out for the full quarter is how the market responded to the geopolitical events. There were stretches of volatility as the conflict dominated headlines in the spring, but stocks moved past them and finished the second quarter higher.
AI Spending Fuels Semiconductor Stock Rally
Semiconductor stocks led the market’s advance, posting their strongest quarter in nearly 30 years. This rally is anchored to a wave of technology investment, with much of the money flowing to the chipmakers. The pace of investment continues to climb: the top five companies are projected to spend about $724 billion this year and nearly $900 billion next year. The capital expenditures pay for data centers, the computer chips inside them, and the equipment and power to run it all. The companies leading the buildout are reporting record earnings and growing backlogs, and many say they’re limited more by how fast they can build than by demand.
The surge in spending is also reshaping financial markets. Private companies are going public to fund their spending, while public companies are turning to debt and equity markets to finance their buildout.
Want to read more? Click below to download our entire Quarter 2 2026 Economic & Market Commentary…
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