After a turbulent first quarter, equity markets staged a powerful reversal — one of their strongest quarterly performances in years. The S&P 500 climbed sharply off its March lows, closing the quarter near record highs, as robust corporate earnings, easing geopolitical tensions, and a broadening of market leadership gave investors renewed confidence. This was not the narrow, momentum-driven rally of prior quarters; it was a broader-based move grounded in improving fundamentals, and that distinction matters.
The most consequential catalyst of the quarter was a short-term ceasefire between the US and Iran, reached as both parties work toward a more comprehensive diplomatic agreement. Oil prices, which had spiked above $110 per barrel earlier in the year, retreated meaningfully on the news — a welcome development that has taken near-term pressure off inflation. Markets thus responded quickly and decisively. That said, the deal is fragile, and actually, there are signs that it has fallen apart and the potential for a breakdown of tensions is real. Any renewed hostilities would likely trigger a swift reversal in energy prices, keeping this the single most important geopolitical variable to watch heading into the second half of the year.
The other major driver was an exceptional earnings season. With roughly 85% of S&P 500 companies beating expectations — well above the five-year average — growth tracked in the high twenties on a year-over-year basis. Crucially, this has been an earnings-driven rally, not a multiple-expansion story. Valuations have actually compressed from their late-2025 peak, with the index now trading around 21 times forward earnings. This creates a more durable foundation for the market’s gains and is showing up in breadth as well: small and mid-caps outperformed, and the average S&P 500 stock bested the index itself — a healthy sign of broad participation.
The AI trade continued to evolve in meaningful ways. While some of the hyperscalers faced investor skepticism over aggressive capital spending, the companies supplying their infrastructure surged. Semiconductor suppliers in particular stood out, driven by explosive demand for high-bandwidth memory in AI data centers. This broadening further down the value chain distributes AI’s economic benefits more widely, reducing the market’s dependence on a narrow group of names at the top. Beyond hardware, productivity gains are increasingly showing up in other sectors as well, such as industrials, logistics, financial services, and retail. This is exactly the kind of diffusion that signals a maturing investment cycle rather than a speculative boom.
Despite the quarter’s strong performance, meaningful headwinds remain. High interest rates continue to pressure rate-sensitive sectors, most notably housing. Compounding this, a reacceleration in inflation has complicated the Federal Reserve’s outlook, effectively pushing near-term rate cuts off the table — a widely anticipated catalyst that is now unlikely to materialize anytime soon. Markets appear willing to accept this trade-off given current earnings strength, but it leaves little margin for error should growth disappoint.
The consumer picture also warrants equally close attention. The “K-shaped” economy narrative continues, with lower- and middle-income households increasingly squeezed by higher prices, rising debt, and modest wage gains. With consumer spending representing roughly 70% of GDP, any meaningful deterioration in this cohort would have broad market implications. And while S&P 500 earnings growth has been impressive, it still depends greatly on infrastructure investment — meaning that should tech firms suddenly scale back their data center spending, the index-level picture could shift.
For investors, this quarter reinforces the value of patience and diversification. The rotation into small caps, memory semiconductors, industrials, and other AI beneficiaries has rewarded portfolios positioned across sectors rather than concentrated in a handful of familiar names. The second half of the year looks constructive on balance, but the variables to watch — the Iran situation, consumer health, and the Fed’s path — are ones that can shift quickly. We are also monitoring the impact of blockbuster IPOs, which could impact sentiment. We will continue to monitor these developments closely and remain ready to act thoughtfully on your behalf. As always, we are deeply grateful for your continued trust, and we wish you and your families a wonderful summer.