BACK
Second Quarter Review: After a turbulent first quarter in which the war with Iran nearly dragged the major indices into correction territory, the equity market staged one of the largest quarterly advances of this century. The Standard and Poor’s 500 Stock Index gained 15.2% in the second quarter, its best quarter since 2020, the Russell 2000 Small Cap Index increased 21.5% and the MSCI All World ex-US Index rose 14.5%. While equity markets saw healthy increases, the Bloomberg Aggregate Bond Index returned just 0.7%, Gold declined 15.5% in its worst quarter in thirteen years, and the Bloomberg Commodity Index fell 8.1%. For the first six months of 2026, the S&P 500 Index has returned 10.2%, the Russell 2000 Small Cap Index increased 22.6%, its strongest first half since 1991, the MSCI World ex-US International Index rose 13.7%, the Bloomberg Bond Index scratched out a 0.6% return, Gold fell 7.8%, and the Bloomberg Commodity Index rose 14.4%.
Fundamentals underpinned the market as earnings expectations moved higher throughout the quarter, the economy remained on solid footing, and the price of oil steadied despite continued uncertainty around the U.S./Iran conflict. While technology was the main story of the market with the semiconductor sector exploding higher on chip shortages, the market also benefited from a continued rotation into other sectors and categories. By quarter-end small cap, microcap, equal-weight and value benchmarks were all reaching new record highs. Interestingly, the “MAG7” has underperformed the S&P 500 Index by over 12% since the beginning of the year. After being the early winners in the artificial intelligence buildout, Microsoft, Meta, Amazon, Alphabet and Oracle are expected to invest over $700 billion in 2026 alone. Investors have become increasingly concerned as the reliable free cash flow generation of these companies has ceased due to this massive investment offering uncertain returns.
Inflation, the Fed, and Rates: The quarter’s most consequential development for financial markets may have occurred not in the equity market but at the Federal Reserve, where new Chairman Kevin Warsh presided over a June meeting that decisively reset expectations with his “hawkish” tone. Inflation has stubbornly remained above the Fed’s 2% target and the disruption in the oil market is expected to work through the economy for the foreseeable future. Investors entered 2026 anticipating a rate-cutting cycle; they exited June pricing in the possibility of rate increases before year-end. The Ten-Year Treasury yield has increased 0.5% since the start of the year to near 4.7%. The tightening impulse is global: the European Central Bank raised rates in June for the first time in nearly three years, warning that energy-driven inflation pressures were broadening, and the Bank of Japan raised rates to 1%, the highest level in thirty years.
The Everything Equity Market: While the artificial intelligence buildout remains the engine of the equity market, the broadening of stocks with positive momentum has been impressive. There are many under-the-radar advances that have been beneficial to portfolios. For example, the trailing twelve-month returns for the DFA Large Cap Value Fund and DFA Small Cap Value Fund through 6/30 were 29.6% and 33.2%, respectively, easily outpacing the 22.3% return of the S&P 500. The DFA International Fund gained 30.4% for the same period. Despite the market strength, we are still identifying compelling investment opportunities in individual companies, sectors, and asset classes. As we stated in our prior review, we are very cognizant of the extraordinary amount of portfolio growth that has occurred over the past decade and respect the likelihood that the next ten years will not be as lucrative for investors. Your time horizon is a vital factor in investment strategy, especially when lifetime financial goals have largely been achieved. The level of interest rates would generate more attention for investment towards bonds in less frothy investment climates, and if rates continue to edge higher, they may soon reveal significant relative value.