July 2026

Resilience and Broadening Participation
Define the First Half of 2026

Financial markets demonstrated remarkable resilience during the second quarter, with performance broadening beyond a handful of large technology companies. Major U.S. indexes reached multiple all-time highs throughout the quarter as investors looked past geopolitical uncertainty and focused on resilient economic conditions and strong corporate earnings expectations.

Despite modest June declines, the S&P 500 and Nasdaq posted their strongest quarterly gains since the second quarter of 2020, rising 14.9% and 21.4%, respectively. A resurgence in artificial intelligence investment helped fuel the technology rally, while improving market breadth brought small- and mid-cap stocks firmly into the spotlight.

The Dow, S&P 500, Nasdaq, Russell 2000, and S&P 400 each reached multiple new all-time highs during the second quarter. Each closed Mid-Year with double-digit gains YTD, except for the Dow.

Small-cap stocks were among the strongest performers during the quarter. The Russell 2000 gained 21.2% in Q2 and, following a 3.6% gain in June, leads U.S. markets with a 21.9% gain year to date. Mid-cap stocks also reached multiple record highs.

International markets delivered strong results as well. Emerging markets surged 23.3% during the quarter, while the MSCI EAFE Index gained 9.8%.

Bond returns were more muted. The Bloomberg Aggregate Bond Index gained 0.7% during Q2 and is up 0.6% year to date. However, interest rates moved significantly during the quarter as investors responded to higher-than-expected inflation readings and changing expectations for Federal Reserve policy.

Economic conditions remained generally resilient despite elevated inflation, high energy prices, and geopolitical uncertainty. AI investment and a strengthening labor market helped support GDP growth estimates ranging from 1.2% to 2.5% annualized.

Oil prices remained elevated near $90-$100 per barrel for much of April and May before declining toward $70 by the end of June amid optimism surrounding a ceasefire in the U.S.-Iran war.

New Fed Chair Kevin Warsh's first FOMC meeting in June was viewed as more hawkish than expected, emphasizing the Federal Reserve's commitment to price stability and its 2% inflation target. Markets subsequently began pricing in at least one rate hike by year-end. The 10-year Treasury yield rose 0.14% during Q2 to 4.44%, while shorter-term interest rates moved up more sharply. The 2-year Treasury yield increased 0.35% during the quarter.

2026 Mid-Year Summary: Resilience Remains the Defining Theme

The overriding theme of the first half of 2026, much like 2025, has been resilience. Despite periodic volatility surrounding the U.S.-Iran war, rising energy prices, inflation concerns, and shifting expectations for Federal Reserve policy, equity markets continued to reward long-term investors. Corporate fundamentals remained generally healthy, and economic stability continued to support markets.

One of the most encouraging developments has been the broadening of market participation. Performance expanded beyond a relatively small group of large technology companies, with value-stocks, small-cap stocks, mid-cap stocks, international markets, and emerging markets all contributing meaningfully to overall returns.

The U.S. economy has also continued to demonstrate resilience. Consumer spending remains steady, and the labor market remains relatively healthy. At the same time, inflation and interest rates remain important factors for investors to monitor.

The first half of the year has once again reinforced the importance of diversification. A well-diversified portfolio can help investors navigate changing market conditions and manage risk across a variety of economic and market environments.

July Update 
The third quarter began with continued momentum, as the Dow reached another record high, closing above 53,000. However, market nerves increased as questions surrounding the fragile U.S.-Iran ceasefire resurfaced, oil prices moved higher, and technology stocks experienced a notable pullback. International markets also became more cautious.

Inflation remains a key concern, although the latest June CPI and Core CPI reports were cooler than expected. The Federal Reserve is scheduled to meet July 28-29, and while markets currently expect another pause, expectations remain high that at least one rate hike could occur before year-end.

Interest rates have also moved higher in July. The benchmark 10-year Treasury yield rose to approximately 4.69%, compared with 4.30% at the end of June.

The Outlook

We remain cautiously optimistic about the second half of the year while recognizing that uncertainty remains elevated and the macroeconomic environment is complex. Periods of volatility are a normal part of investing and, for long-term investors, can also create opportunities.

As we look toward the second half of 2026, several key issues will remain on investors' watchlists:

• Inflation and expectations for Federal Reserve monetary policy
• Geopolitical risks involving Iran and global energy supplies
• Corporate earnings and profit growth
• The upcoming midterm elections
• The potential for continued market volatility

Key Takeaways for Investors
Diversification, patience, and discipline remain critical components of successful long-term investing.

• Remain well-diversified. Market leadership can change quickly, and broad diversification can help manage risk.
• Maintain discipline and patience. Short-term volatility is an inherent part of investing.
• Keep your focus on the long term. Markets can fluctuate significantly over shorter periods, but long-term goals should remain the primary focus.
• Review your risk tolerance. A portfolio should remain aligned with your financial goals, time horizon, and ability to tolerate market volatility.
• Begin year-end planning early. Tax, retirement, income, and investment decisions are often best addressed before year-end deadlines approach.

We encourage you to remain focused on your long-term financial goals and avoid making emotional investment decisions based on short-term market movements.

Call your Nelson Advisor today at 800-345-7593 to discuss your portfolio, your financial goals, or any concerns you may have about current market conditions.

~ Your Nelson Securities Team

Past Performance Is No Guarantee of Future Results

Past Performance is No Guarantee for Future Results

This article is for informational purposes only and does not constitute investment advice.