Q2 Market Recap

Hey everyone and thanks for joining us on our latest edition of the podcast. Today Will and I are going to cover a little bit of what happened in the second quarter of 2026 and some thoughts on you know what you know lays ahead for us for the balance of the year. I think to get things started Will is going to cover performance of some different indexes for the first half of the year.

Thanks Zach and hi everyone. So what you're looking at here is a chart of returns for like the major indices of you know what we would consider a diversified portfolio if you invested in the asset classes and mutual funds and ETFs that track these indexes. So this is year-to-date January 1st, 2026 through June 30th, 2026. And if you can see you know that the stock market investments in the lines purple, orange, green, blue going from highest to lowest you've got the emerging market index some smaller countries.

China makes up a big part of it. You're looking at like South Korea, Brazil, India followed by the small cap index that follows the US small company market caps of below 2 billion dollars here in this country. And then in the middle there at 10 and 9% you've got the S&P 500 US large cap index and then the MSCI EAFE that's the developed international index. So larger countries in Europe, Japan makes up a good part of that one. And then at the bottom the flat pink line that's up slightly is the US aggregate bond index.

So those are the asset classes that we're looking at you know from highest to lowest and then if I go to the next slide we can kind of dive in on how the second quarter went for each of those. And you can see the leadership is still the same emerging market and small cap have, you know, led since the market recovered after the initial shock of the Iran war that took place earlier this started earlier this year and is still going. There has been a divergence with the S&P 500 and the MSCI EFA.

So US has outperformed international in the international developed in the second quarter of this year. And I think, you know, one way to think about why that is is the continuation and the dragging on of the Iran situation has kept energy prices elevated and that that will have a bigger impact on places like Europe, Asia, they're a little bit more reliant on the oil that comes out of the Middle East for the for their economy where the US is a net energy producer. So we are not as impacted.

I mean, everyone's feeling the prices at the pump, but it's at a macro level not as impactful for those for those energy prices. And then bonds still flat and I think one takeaway that we wanted to highlight is, you know, the market had a basically a correction in the first quarter followed by a big recovery in the second quarter all while the bonds just kind of stayed flat, held their value. And you know, by year end we would expect them to have a nice return because of where they interest rates are and what they're paying today. I'll stop there.

Yeah. Just a couple other kind of interesting things, at least things that I find interesting. So the small cap, that Russell 2000, that purple line there. For a long time small cap companies underperformed and the larger companies. But this is actually the sixth straight quarter that the small cap index has made money. And it is also Oh, pardon me. The fourth strongest quarter they've had in the last 30 years. So it's really nice seeing kind of some continued good performance from the small cap index and also small caps are the makeup of them like the different types of companies are a little bit different than say like the S&P 500.

Small cap companies tend to have a little bit more like financials or bank exposures. That with higher interest rates have performed really well. Another thing like the S&P 500 is is done good and I think one of the big topics that people talk about a lot is that a lot of that is the mag seven or like the big technology names which they do make up a good part of it. But also we've seen what we consider like a broadening out where it's not just those big technology companies.

In one way that we can see that is there's an index that's not shown here, but it's called the Dow Jones Industrial Average which tends to be a little bit less of like those growthy names. How they construct the index is a little bit different. But it's had its strongest first half performance this year in the last 5 years. Up almost like 10%. So it's nice seeing some of those more industrials or materials or utility companies do do well. Yeah, just some things that that I thought were interesting.

Yeah, and that's a big fear I think we and other you know people who follow the market really closely that when the S&P 500 led by the Magnificent Seven it's the giant technology companies that most people deal with on a daily basis. You know them all. That if they weren't continuing to lead the market higher, then the bull market would end and your returns wouldn't be as good, but that's not the case because if you look at them on an individual level or maybe group them all together, the seven, they're underperforming a lot of the things you see on your screen, including the broad market, the Dow Jones, small cap international.

And we know we've talked about a diversified portfolio for a long time and it's more important now than ever. You've got the risk in what's going on with AI and the amount of spending the companies are doing. You've got geopolitical risk with the two wars going on and the Iran situation, you know, continuing longer than people originally expected. And then the third thing to kind of think about as a as a risk for the second half of this year would be midterm elections, which you know, political volatility, emotions [clears throat] running high, you know, can impact investor behavior, but again, being diversified is is probably the best way to handle you know, the uncertainty of the second half of this year.

And next slide we're going to look at is country returns. Just talking about that international diversification that we've, you know, talked about a lot on these calls. Yeah, I think this is just a really neat illustration of, you know, what countries did well. And you can see the US is kind of there on the we'll say the left third of the page. That is the Russell 3000 index. So, the 3000 largest companies in the US. But you can see all the way to the left there you have Korea, which was up about 78% I think in the quarter.

Taiwan was also up there and you know, for those two countries, a lot of it is, you know, big technology. You know, the country companies like SK Hynix and Samsung and Taiwan Semiconductor have done very well as the semiconductor kind of build out for AI has taken you know, taken the world by storm. But I think one thing to note is that those companies earnings are growing at you know, numbers that people have never seen before. So those are supported by you know, it's not just valuations are getting way out of hand.

It is they are making more money than they ever had before. And I know Will that we're talking a little bit earlier about, you know, earnings overall in the US have also you know, picked up of what used to be expectations for 2026 were about like 14% earnings growth. Where based on first quarter earnings and you know, so far what we have learned from the second quarter, those earnings expectations are now closer like 22 or 23%. So, the markets are pricing expectations that are you know, higher than they were at the beginning of the year, which is a good chunk of why things have done so well so far this year.

Yeah, definitely. And if you're worried about like excess in the market or speculation, so far this bull market has you know, had consistent earnings growth and that's what ultimately drives stock prices higher. Other news headlines and conflicts can be temporary impacts on market prices, but it is the earnings growth that is the most important driver, you know, going back to the beginning of the stock market 100 years ago.

Funny, I think I see Norway down as a negative for the quarter. I wonder if that's they're all focused on their World Cup wins.

Yeah, the US unfortunately is out. They gave it a good try.

Yeah.

All right. And then this is the quarterly market summary.

Yeah, so it's this is just a lot of the same information on the previous slide two slides ago of just, you know, what happened in the quarter. But I think it's interesting to also look at this on the bottom it shows, you know, since 2000 what has been the average quarterly return, what was their best quarter, what was the worst quarter. So if you start out US stock market, it's the Russell 3000 again, you know, on average per quarter Russell 3000 earns 2 and 1/2%. We earned 15% in the second quarter.

So fantastic quarter, but you could see, you know, the worst quarter in history was, you know, during the midst of the great financial crisis in 2008 where it fell 23% in the quarter. You know, the best quarter was during the pandemic after, you know, Q1 2020 the market sold off heavily and then things kind of rebounded in Q2. That that V-shape recovery. And you know, the same thing can be said with international and emerging markets. You know, both you know, really strong quarters compared to history.

But we you can see all the way to the right there and that shows bonds for the US bond market and then the global market for bonds. And okay, I see 15.4% for the stock market, but the bond market did, you know, 0.67% which is actually below its quarterly average. But I think one of the big things you could see there at the bottom like the worst quarter in history for bonds was, you know, minus 6% and it was in 2022 when inflation was about 9%.

The Fed was hiking interest rates. Inflation was 9% because of all the stimulus that you know occurred during the pandemic was a reason for a lot of it. And well, I think on this next slide shows just how interest rates have changed. And as interest rates move up, your bond prices fall. So that dark green line at the bottom. So this is is the yield curve for the US Treasury market. And the left shows, you know, the yield that you earn. So that's the same yield that you get from you know, your savings account at your bank.

You know, those kind of move up and down based on the Treasury curve. The same thing with mortgage rates. They kind of move up and down based on what this Treasury curve does. This kind of sets the market for all interest rates. And then as you go out further, you know, time period on the bottom axis, you know, from you know, 3 months to 5 years to 10 years to 20 years, you expect, you know, to get a higher interest rate for taking more, you know, duration risk.

You could see there the dark green at the bottom shows what rates were 5 years ago. So July 7th, 2021. You know, Fed cut interest rates during the pandemic to more or less zero to kind of spur the economy and try to keep us out of recession. With them doing that and with there all there was a lot of, fiscal stimulus, people started spending money, inflation crept up, and the way that you kind of slow inflation is by raising interest rates. So rates have moved up a lot over the last 5 years.

You can see at the start of the year we is that light green bar. And so it's just so far this year we've gone from a light green bar to the orange bar. And that little uptick has led to why you know, the bond market only returned, I think it was 0.67% in the first the second quarter. But these higher starting the yields that we're at now tend to be lead to higher returns over you know, the next 5 years or so. So, as much as you know, the higher yields, you know, lessen your returns right now, but over the long term if you know, remain invested in bonds, you I don't think you'd be surprised to earn, you know, 5 to 6% bonds with these higher starting yields.

And it protects, you know, your portfolio against you know, volatility that you kind of experience in the stock market. And I think you know, one of the reasons why there are volatility historically has been midterm elections, which I think this next slide is going to cover a little bit.

And then the only other thing I'd add on the yield curve is in holding bonds today as opposed to, you know, 5 years ago. Y- the Fed you know, impacts this leftmost piece of the yield curve, like where the short-term rates are. And you know, they're on hold right now for whether they raise or lower and the expectations of a raise have gone up as inflation has been elevated with the energy prices, but when thinking about bonds in your portfolio as like more of the safety net or they kind of cushion the volatility of the stock market, I think you can feel really good about holding bonds as that anchor of the portfolio because now there is room for the Fed to cut rates where 5 years ago when rates were at zero, there was really only one direction to go.

Now, in the event of some sort of slowdown in the economy or the stock market has some weakness because of you know, any anything the Fed does have room to cut rates, which would be a boost for bonds and your portfolio if you're holding bonds. And then the last slide here. So this is S&P 500 on average returns from 1931 to 2025. The teal line on top is a typical year in the stock market without a midterm election. And then the dark blue line is a average midterm election year.

And as you can see more volatile, choppier, flat performance through October. And then the market tends to drift higher after there's some certainty and the elections are over. This is not you know necessarily a prediction of what's going to happen this year, but it wouldn't be surprising if it followed a similar path given you know we've had a little bit of a higher than average return in the second quarter. A lot of uncertainty, you know, in the second half of this year. And you know, the way that you know, our society we're very politically charged these days and that can you know impact investments in the short term.

But just an interesting way to look at all of the years versus midterm years and how the how the S&P 500 has you know, historically performed.

Yeah. You know, I feel like we say it all the time that the market you know, doesn't like uncertainty and having midterms out of the way in November should be supportive for you know, getting that uncertainty a little bit less. And also you know, there's uncertainty regarding the war in Iran right now which hopefully we get some clarity on soon and put and can put an end to it. But it's interesting. I feel like the last couple years it's been like if you just looked at the end of the year what the markets did and didn't pay attention to it all year long, like you'd think there was not a whole lot going on.

You know, in the first half of the year we're up, you know, 10% we'll call it in the first half of the year. And last year, I don't remember exactly what the S&P 500 did, but the US market did well. Last year we had all of the liberation day terrorist and markets sold off heavily in the second quarter, but came back to do well on the at the end of the year. And so far this year, you know, we had war and Iran that started, caused a lot of volatility in the first quarter, second quarter was, you know, one of the best quarters we've seen in a long time. So the market is a state climbs a wall of worry, and I think this is another really good example of it.

Definitely. So, best thing you can do is, you know, take a long-term perspective, have a diversified portfolio, and, yeah, have a good second half of the year. That's all I got, Zach.

Yeah, no, I think that's perfect. Yeah, thank you guys for listening. If you have any questions, please contact your advisor. We're always there to answer any questions. Take care and we will catch you on our next podcast.

Thanks.

Bye, buddies. Bye.

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