Quarterly Market Review 2026 Q2

What a difference a quarter can make. After a turbulent start to 2026, marked by geopolitical uncertainty, rising energy prices, and growing questions about the direction of interest rates, the second quarter delivered a meaningful market recovery.

U.S. stocks posted their best quarter since the spring of 2020 (+15.44%), European markets closed at their strongest quarter since late 2020 (international markets +10.22%), and emerging markets stocks stole the show with the most impressive gain (+24.05%) across the board.

Much of the global momentum was driven by a renewed surge of enthusiasm for artificial intelligence (AI), with technology stocks, particularly companies specializing in hardware, posting some of the largest quarterly gains on record. At the same time, hopes of an end to the Iran war sent oil prices lower, easing the worst-case inflation fears that had weighed on markets earlier in the year.

On the bond side, the Federal Reserve held interest rates steady. Therefore, the Federal Funds rate remains at 3.5% - 3.75%. Additionally, the outlook for interest rates has changed from earlier in the year. The market is now expecting one or two rate increases by year end instead of the previously expected rate cuts.

Below is a snapshot of key top-line economic indicators:

U.S. Stocks

U.S. stocks delivered a strong second quarter, gaining approximately 15.44% — the strongest quarterly performance since the spring of 2020. In a similar pattern as the first half of 2025, the U.S. stock market overcame early geopolitical uncertainty that heavily impacted Q1 and rebounded on technology optimism during Q2.

While the first quarter was heavily impacted by artificial intelligence's disruptive potential, particularly in software, the second quarter rally was driven by a shift in attention to the physical buildout of AI infrastructure, with hardware stocks posting some of the largest gains for the quarter. This resurgence comes even after three years of significant AI-driven gains, underscoring the continued enthusiasm investors have for the sector.

International Stocks

International stocks closed their strongest quarter since late 2020, up 10.22%. As in the U.S., artificial intelligence enthusiasm was the primary driver, driving the European technology sector up nearly 40% and helping markets recover from the sharp March selloff tied to the Iran war. Financials and industrials also contributed meaningfully, rising 18% and 12% respectively.

Emerging markets were the standout performers of the second quarter, posting an impressive 24.05% gain in Q2. South Korea, stocks rose more than 75% in U.S. dollar terms, making it their best quarter since 1998. Taiwan’s gain was its biggest since the end of 2001.

As with other markets around the world, AI enthusiasm played a meaningful role in driving gains, with a decline in energy prices providing some relief from inflation pressures that had weighed on developing economies earlier in the year. Stronger risk appetite globally also supported flows into emerging markets' assets during the quarter.

Fixed Income

The first half of 2026 brought with it a dramatic reversal in expectations for U.S. interest rates. Heading into the year, rate cuts were expected in response to labor market softness in 2025. That outlook changed in the first half of 2026 with the energy-driven inflation spike and a series of stronger-than-expected jobs reports. By the time new Fed Chair Kevin Warsh held his first press conference in June, bond markets were pricing in one or two rate hikes in 2026. Of course, that does not mean those increases will actually take place.

Despite the ever-present noise, our focus remains where it always has been — on your long-term goals, your financial plan, and making thoughtful, disciplined decisions regardless of what markets are doing in any given quarter. Even after a great quarter, it's helpful to remember that short-term fluctuations are a normal and expected part of investing. What matters most is staying the course.

As always, we are grateful for the trust you place in us and welcome any questions you may have. Please don't hesitate to reach out.

Sincerely,

Your Taurus Capital team