The second quarter of 2026 was quite eventful for equity investors, with some of the strongest returns since the second quarter of 2020. In my view, the quarter played out in two very distinct parts, the first two months of the quarter, and the last four weeks.
A Quarter in Two Parts
You could say that the tone for the second quarter equity markets was set on the last trading day of the first quarter. From the start of military actions in Iran on February 28 until March 30, according to Bloomberg, the S&P 500 declined 7.7%, while the NASDAQ Index was down 9.7%. On March 31, the S&P 500 moved up 2.9% while the NASDAQ gained 3.8%. You will not see many one day returns stronger than that! The near-term sell-off appeared to be behind us, and investors seemed optimistic.
We started the second quarter with surging oil prices from the war in Iran, rising inflation numbers and sagging consumer confidence data. Not necessarily the perfect ingredients for a large advancement in stock prices. We were not long into the new quarter when we started to see what would change the dynamic for shareholders over the past three months: corporate earnings.
Earnings Change the Narrative
The first quarter earnings season was, by any definition, very strong. According to Bloomberg, not only did first quarter earnings season significantly outperform current analysts’ expectations, but earnings estimates for the remainder of 2026 also moved higher. Analysts now expect S&P 500 earnings for 2026 to be just over 25% above the earnings from 2025.
As we moved through earnings season in March and April, we were met with continued high oil prices and rising inflation reports that seemed to continue to add to investors’ concerns that the Federal Reserve may have to raise interest rates in 2026, after starting the year with expectations of a rate cut or two.
This combination of strong earnings, elevated oil prices and persistent inflation may help explain why investors favored companies benefiting from the ongoing investment in AI and data centers. From the unofficial start of earnings season on April 14 to June 2, the S&P 500 reached 20 new record closing prices.(1) That surge in stock prices was driven by very narrow leadership, with the Magnificent 7 stocks and a handful of other technology-related stocks doing most of the heavy lifting.
A June Rotation
The closing price of 7,609.78 for the S&P 500 on June 2 was the high-water mark in the second quarter. Two very interesting things happened in early June that seemed to change leadership in the stock market for the remainder of the quarter.
First, Alphabet announced their plan to issue $80 billion in new stock to help fund their continued spending on AI. (2) According to a report from CNBC, Amazon, Alphabet, Microsoft and Meta combined are expected to spend around $700 billion on AI in 2026, and companies are starting to look to issue more stock, or take on debt, to help pay for this massive spending spree. (3) This seemed to make investors a bit skeptical on the actual growth of spending moving forward.
Around that same time, optimism started to show up with the prospect of an end to the war in Iran, and a possible reopening of the Strait of Hormuz. The price of a barrel of West Texas Intermediate (WTI) crude oil fell from around $100 a barrel down to around $70.(4) That is not much higher than we were before the start of the war with Iran.
At the same time investors had concerns that the AI trade may be slowing, the broad economy stocks were given a reprieve with lower oil prices. The month of June was marked by a rotation out of the economic sectors that hold the Magnificent 7 stocks (technology, communication services and consumer discretion) and energy, and into sectors like healthcare, industrials and financials.
| Economic Sector | June Return |
| Industrials | 7.29% |
| Healthcare | 6.62% |
| Financials | 4.37% |
| Utilities | 2.71% |
| Real Estate | 0.84% |
| Consumer Staples | 0.50% |
| Basic Materials | 0.02% |
| Technology | -3.28% |
| Consumer Discretion | -4.69% |
| Energy | -5.06% |
| Communication Services | -7.79% |
After the dust settled on a crazy sector, all major stock indexes showed return of at least 10%, with the NASDAQ showing an eye-popping return of 27.7% for the quarter.
| Index | 2nd Quarter Return | Economic Sector | 2nd Quarter Return | |
| S&P 500 | 15.20% | Energy | -13.45% | |
| Dow Jones Industrial Avg | 13.38% | Communication Services | 8.32% | |
| NASDAQ | 27.73% | Financials | 9.00% | |
| EAFE International Index | 10.29% | Industrials | 14.85% | |
| S&P Mid Cap 400 | 14.47% | Healthcare | 8.78% | |
| S&P Small Cap 600 | 18.92% | Basic Materials | 2.04% | |
| Technology | 31.79% | |||
| Consumer Staples | 0.33% | |||
| Utilities | -0.53% | |||
| Consumer Discretion | 9.27% | |||
| Real Estate | 8.52% |
Looking Forward
After such a strong earnings season last quarter, it is difficult to imagine that this upcoming earnings season will be as impactful. However, industry analysts continue to expect strong earnings performance from corporate America despite already elevated expectations.
According to this article by Emily Jarvie for proactiveinvestors.com:
Deutsche Bank expects S&P 500 companies to deliver another strong earnings season, writing that a favorable macroeconomic backdrop and continued momentum in artificial intelligence-related sectors should help corporate profits exceed already elevated expectations.
The bank wrote that Wall Street currently expects S&P 500 earnings to grow 26.2% year over year in the second quarter, marking the highest consensus growth forecast heading into an earnings season outside of post-recession recoveries. Deutsche Bank forecasts earnings growth of 29.3%, implying companies could beat consensus estimates by roughly 3%.
While Deutsche Bank is only one firm making predictions, what a whopper its 26.2% forecast is! By the time some of you read this article, we will already know the strength in the second quarter of 2026’s ‘earnings season.’ We can only wait and see if Deutsche is somewhat close with its call.
But with higher crude oil prices during the past quarter and slightly slower job growth in June, just how much can we really expect? From an economy which is growing modestly, but is far from overheating?
If you are a glass is half-empty investor, you might think slower consumer growth in the second quarter will weigh on corporate America’s profitability. That is certainly understandable, and might be the ‘path of least resistance.’
However, if you are a glass is half-full sort of person, you might have a different take. After all, thanks to the boom in AI investment, the technology sector has been posting some impressive profits. This, intuitively, probably has little to do with short-term consumer behavior. Basically, while higher energy prices could influence capital allocation decisions, many companies continue to view AI investment as a long-term strategic priority.
Now, will the tech sector be able to pull off another 30+% return in the third quarter like it did in the second? Considering how unusually strong that return for a 3-month period is/was, it is our view that repeating quarterly gains of more than 30% would be challenging based on historical market experience. However, that doesn’t necessarily mean it can’t perform well again. After all, while few investors expect AI investment to come to a sudden halt, future spending levels will ultimately depend on economic conditions, corporate priorities and regulation. While no one knows how long the current pace of investment will continue, many investors still view AI spending as a significant long-term theme.
Further, being that half-full person, you realize higher prices at the pump could lead to higher profits in the energy sector. After that sector’s ugly returns this past quarter (please see table), it is unlikely, in opinion, that many energy company CEOs have been upset about the recent higher crude oil prices.
Although, the markets ended June on a slightly softer note after feverish results in April and May, analysts remain hopeful US companies will be able to maintain their profitable ways despite a challenging quarter for the economy. If the tech sector can approximate some of the rosier expectations, investors could see broader market participation across the board.
As such, the upcoming earnings season will be incredibly important. Will corporate America be able to continue to surprise? Will it be as impactful as this past earnings season was?
It is hard to imagine it will be, but weirder things have happened….like, for instance, the 2nd Quarter of 2026.
SOURCES:
- YCharts – S&P 500.
- CNBC – Alphabet’s $80 Billion Stock Sale Leaves Wall Street in ‘Unprecedented Territory,’ Says Goldman’s Gutman. June 3, 2026.
- CNBC – Tech AI Spending May Approach $700 Billion This Year, But the Blow to Cash Raises Red Flags. Feb 6, 2026.
- YCharts – Average Crude Oil Spot Price.
- Proactive Investors – S&P 500 Companies Expected to Clear High Bar in Q2 Earnings Season. July 1, 2026.
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