The dominant factors for financial markets during the second quarter of 2026 essentially recapitulated those in the earlier part of the year: the extent of disruptions to the world’s oil supply (with major implications for inflation) and the durability of the AI-driven spending spree that propelled indexes to new highs during the period. As this is written, an imminent resolution of hostilities in the Strait of Hormuz seems less likely, as the US and Iran continue to trade air and drone strikes. Financial markets tend to ebb and surge in tandem with hopes for stability in the Persian Gulf.
Notwithstanding these concerns, equities rebounded strongly from the lows reached at the end of March. For the three months ending June 30, broad U.S. stocks, as measured by the Russell 3000 Index, rose 15.4%; the S&P 500 rose a similar amount; and small U.S. companies gained nearly 21%. Globally, international developed equites rose 10.2% and emerging markets continued their ascent, rising 24.1%. Bond prices remained relatively stable, gaining 0.7%, as the 10-year U.S. Treasury bond currently yields approximately 4.5%. Rotation out of the large tech sector aided many portfolios: the Mag 7 stocks managed a return of somewhat less than 2% for the quarter. The impact of higher inflation on growth stocks generally and on tech stocks particularly continues to contribute to investor worries about the sustainability of AI-driven spending.
Continued hostilities in the Strait of Hormuz have resulted in higher fuel prices throughout the world, a major component of cost-of-living calculations. The CPI came in at 4.2% in May, its first time at that level since early 2023. The producer price index (PPI), which reflects input prices, rose even more, up 6.5% over the same period. Further, longer-term implications for energy prices suggest that even if fighting ends soon, the need of the US and other nations to restore strategic petroleum reserves to pre-war levels is likely to keep costs elevated for some time. Another unknown is the extent of control Iran will be able to extract as part of a future settlement. Any such constraint, with presumed imposition of added costs for transporting oil through the region, would add to energy costs going forward, producing yet another upward push on inflation. All in all, energy prices are likely to stay elevated for some time, keeping inflation well above the Federal Reserve’s 2% target.
On the other hand, US unemployment held steady at around 4.2% during Q2. Manufacturing shows signs of entering a growth period, as the ISM manufacturing report indicates six consecutive months of expansion. Similarly, the service sector has displayed 24 consecutive months of growth. Consumer spending was resilient during the period, but if inflation continues to rise, incomes could face increasing strain, which could be expected to lead to weakness in corporate revenue growth.
Your Rothschild advisor can work with you to review the implications of the current economic and financial environment in the context of your specific circumstances. Please reach out to us with any questions.
