Quarterly Performance Update

Why Did U.S. Stocks Rally in Q2 2026?

After posting a first-quarter loss, the S&P 500® Index rebounded sharply to deliver its best quarterly return in six years. Risk-on sentiment took hold as tensions in the Middle East eased and investors returned to the artificial intelligence (AI) trade. The broad-based stock index returned 15.2% for the second quarter, which pushed its year-to-date gain to 10.21%.

Oil prices retreated as the U.S. and Iran entered a ceasefire and tried to forge a lasting peace agreement. Meanwhile, strong earnings from semiconductor companies and robust capital spending plans for AI-related products triggered soaring returns for information technology (IT) stocks.

Additionally, U.S. economic data remained resilient, as the economy logged a better-than-expected first-quarter growth rate of 2.1% (annualized), up from 0.5% in Q4 2025. Job growth slowed somewhat in the quarter but remained in line with the 12-month average. The unemployment rate inched lower by quarter-end, to 4.2%, its lowest since June 2025.

Which Market Segments Led Performance in Q2?

Size- and style-specific indices soared for the quarter. Small-cap stocks outperformed their mid- and large-cap peers. Across the board, the growth style outpaced value stocks.

Small-cap growth stocks (Russell 2000® Growth Index) were top second-quarter performers, up nearly 26%. Mid-cap value stocks (Russell Midcap Value® Index) were among the weakest, yet they still returned 13.4%.

Nine of the S&P 500 Index’s 11 sectors posted gains, led by IT, up nearly 32%, industrials up nearly 15%, and consumer discretionary, up more than 9%. Falling oil prices contributed to the energy sector’s loss of more than 13%. The utilities sector declined by nearly 1%.

How Did the Fed's June Meeting Affect Markets?

The Federal Reserve (Fed) left its benchmark lending rate in a range of 3.5% to 3.75%, where it’s been since December 2025. However, at the Fed’s June meeting, policymakers lifted their inflation forecast, and several officials forecasted at least one rate hike by year-end.

The Fed’s June meeting also featured the debut of new Fed Board Chair Kevin Warsh, who reiterated the central bank’s commitment to achieving price stability. Additionally, he outlined his plans for reforming Fed operations, including ending traditional forward guidance on future interest rate decisions.

Non-U.S. Developed Markets Stocks Lagged Their U.S. Peers

Non-U.S. developed markets stocks also rallied for the quarter, but not at the robust pace of their U.S. peers. The MSCI World Ex-U.S. Index returned 10.22% for the quarter, pushing its year-to-date gain to more than 9%.

How Did European Stocks Perform During the Quarter?

Similar to the U.S. market, the easing of geopolitical tensions and falling energy prices helped drive European stocks higher. Additionally, renewed enthusiasm for AI-related spending supported solid gains in the region’s technology sector and fueled improving earnings outlooks.

Eurozone inflation rose through May, remaining well above the European Central Bank’s (ECB’s) 2% target, before moderating in June. Nevertheless, the ECB hiked interest rates in June for the first time in nearly three years.

U.K. stocks advanced but underperformed the broader European market for the quarter. As in other markets, the de-escalation of the Iran conflict helped improve investor sentiment. However, with a tilt toward value-, defensive- and commodities-focused sectors, the U.K. stock market didn’t have as much exposure to the technology sector rally.

The Bank of England held rates steady in the quarter, as headline inflation stabilized. However, policymakers cautioned that volatile energy markets could push inflation higher later in the year.

Japan’s stock market advanced and outperformed the broad non-U.S. index. The global rally in AI and semiconductor stocks and continued strength in Japan’s manufacturing sector helped drive performance. Meanwhile, inflation edged higher in May, and the Bank of Japan lifted interest rates to their highest level since 1995.

South Korea and Taiwan Propelled Emerging Markets Stocks

Emerging markets (EM) stocks (MSCI Emerging Markets Index) significantly outperformed developed markets stocks, gaining more than 24% for the quarter. This was the index’s best quarterly gain in 17 years. Year to date, the index was up nearly 24%.

South Korea and Taiwan were key drivers of EM performance, with both markets benefiting from strong investor demand for electrical equipment and semiconductor stocks. With two prominent index companies doubling and tripling in value, South Korea logged its best quarterly performance since 1998.

Meanwhile, other EM stocks didn’t fare as well. Stocks in China, among the EM index’s largest components, declined on retail and auto sector weakness. Emerging markets in Latin America and the Middle East with significant energy sector exposure also underperformed the EM index.

U.S. Bonds Delivered a Modest Gain in Q2

The Bloomberg U.S. Aggregate Bond Index returned to positive territory in the quarter, gaining 0.67%. All index sectors advanced in the second quarter.

Alongside ongoing inflation fears and an increasingly hawkish Fed, Treasury yields rose for the quarter. The yield on the 10-year Treasury note ended June at 4.47%, up 15 basis points (bps) from March-end. The two-year Treasury yield rose 39 bps, from 3.81% to 4.20%, and the yield curve flattened.

Within the index, investment-grade corporate bonds were top performers, outperforming the index average and other investment-grade sectors. Mortgage-backed securities outperformed Treasuries but underperformed the index average. Credit spreads tightened in the quarter, more notably among high-yield corporates, which outperformed investment-grade corporates.

Economic data generally remained upbeat in the quarter, while inflation edged higher. Headline inflation in May climbed to its highest level in more than three years, largely due to the energy shock. The annual core personal consumption expenditures (PCE) index, the Fed’s preferred inflation gauge, rose 3.4% in May, well above the Fed’s 2% target.

How Did Global Bonds Compare With U.S. Bonds?

Government bond yields in Europe and the U.K. declined for the quarter, as investors grew increasingly concerned about economic growth prospects. This factor, combined with easing geopolitical risks and inflation fears, prompted markets to lower their expectations for central bank tightening.

The U.S. dollar rose versus other currencies, largely due to expectations for higher U.S. interest rates, stronger U.S. growth and perceived safe-haven demand for the greenback. Bloomberg’s dollar-hedged global bond index returned 1.3% for the quarter, outperforming U.S. bonds.

Risk-on sentiment, attractive yields and moderating geopolitical tensions helped EM bonds rebound from a weak first quarter to deliver strong second-quarter gains. U.S.-dollar-denominated sovereign securities were top performers in the EM debt universe, though local-currency-denominated bonds and corporates also outperformed U.S. and global bonds.