What Drove the Market in the Second Quarter
The second quarter was a sharp reversal from the first. After the S&P 500 declined roughly 4% in Q1 amid the Iran conflict, a Strait of Hormuz closure, and a spike in oil prices, the index rallied approximately 14% in Q2 — its strongest quarterly performance since 2020. Two forces drove the recovery: easing geopolitical tension, as negotiations toward a resolution in Iran progressed and oil prices retreated from their spring highs, and a robust corporate earnings season that confirmed AI-related capital spending is translating into real profit growth. First-quarter S&P 500 earnings grew roughly 28% year-over-year on the fastest revenue growth since 2022, led by technology and communication-services companies. Semiconductor and AI-infrastructure names — including Nvidia, Micron, Alphabet, Amazon, and Meta — accounted for a disproportionate share of both earnings growth and index returns, underscoring how concentrated this rally remains in a relatively small group of mega-cap beneficiaries of the AI buildout.
Year-to-Date Performance
Through July 1, the S&P 500 is up approximately 9% year-to-date, having fully recovered the first quarter’s decline and then some. That figure masks a wide dispersion beneath the surface: the Nasdaq Composite has outpaced the S&P 500 given its heavier technology weighting, while the more broadly diversified, price-weighted Dow has lagged with a high-single-digit gain. Market leadership remains narrow, with the largest technology and AI-linked companies now representing roughly 40% of S&P 500 market capitalization — a dynamic I continue to monitor closely as it relates to portfolio concentration and diversification.
What to Watch in the Second Half
Federal Reserve policy: Under new Chair Kevin Warsh, the Fed has held rates at 3.50–3.75% through mid-year, and elevated inflation — running near 4% — has pushed rate-cut expectations for 2026 off the table, with some participants now discussing the possibility of a hike. Inflation and tariffs: A 10% global tariff is set to expire in late July, and the administration has signaled new tariffs may follow; combined with still-elevated energy prices, this keeps upside inflation risk in focus. Geopolitical developments: The Iran conflict has de-escalated but is not fully resolved, and oil prices remain sensitive to renewed disruption in the Strait of Hormuz. Earnings and valuations: Q2 earnings season is underway with consensus calling for roughly 23% year-over-year growth; with the index trading near a historically rich forward price-to-earnings ratio of 22, results and guidance from the AI-infrastructure names that have driven the rally will be closely scrutinized. Market breadth: Continued reliance on a narrow set of mega-cap leaders is a risk worth watching — a broadening of participation would be a healthy sign for the durability of this advance.
This letter is for informational purposes only and does not constitute personalized investment advice. Index performance is provided for illustrative purposes; you cannot invest directly in an index. Past performance does not guarantee future results.