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The stock market roared ahead during the second quarter. Importantly, returns were driven largely by robust profit growth rather than by multiple expansion from investor enthusiasm. Investors have corporate spending on the AI buildout to thank for this, while consumer spending didn’t provide as much of a growth impulse. Markets also were glad to welcome SpaceX to the ranks of publicly traded stocks as the largest initial public offering (IPO) in history, with other mega deals slated to follow.
While the market continued to let the good times roll, there was a roller coaster of sentiment over the conflict in the Middle East. At times, the war appeared to be ending, but that continued to be subject to change. Even if the conflict comes to a definitive end, the supply chain disruptions it has caused will take time to unwind. Consequently, both the absolute level and rate of change in inflation are in question, and interest-rate outlooks globally lean hawkish as of this writing.
In the second quarter, strong public equity results were offset by flat returns from bonds and real assets. Hedge funds generally posted mid-single digit returns. This provided important diversification from stocks, bonds and real assets, which have experienced an increase in correlations of late due in part to artificial intelligence (AI) investment themes creeping into all of those asset classes.
Key Areas of Focus for the Remainder of 2026 Include:
- Inflation: How quickly can it subside? Fed rate hikes are key risks to the current bull market
continuing. Interest rates impact asset prices and economic growth potential, so FEG is keeping
a close watch on Fed policy. The outlook for rates will hinge in part on the Middle East conflict
supply side ripple effects and price of oil, which in turn affects inflation and growth. - AI: A notable difference been 2026 and 1999 is robust stock market performance being driven
by profits as opposed to multiple expansion. Strong profit growth likely needs to remain intact for
the party to continue in the stock market. One company’s capex is another company’s revenue.
In other words, the strong profit backdrop is directly related to the AI boom and something to
monitor closely. - Capital Markets: A side effect of a healthy investing backdrop is typically strong capital markets
activity. FEG is seeing signs of life with IPOs, mergers and acquisitions (M&A), credit creation,
new business formation, and more. A Goldilocks, “just right” level is what markets like best. Too
little capital markets activity and perhaps an economic cooldown is underway. But too much
activity could be signs of a heated bubble forming. It’s helpful to follow the money to get a sense
of where the economy is heading.
The stock market is on a tremendous three-and-a-half-year run. Over 20% annualized returnsare not the norm. Investors should enjoy it but shouldn’t get lulled into a false sense of security. In times like these it is easy to start asking “Why own anything other than equities?” It’s key to remember that market cycles come and go. A well-crafted Investment Policy Statement is your best friend as a long-term investor. Clearly articulate the risk your portfolio can bear via strategic asset allocation. And have ranges around those targets wide enough to provide tactical flexibility to manage near-term opportunities and risks.