Download Q2 2026 Market Outlook.
MARKET OUTLOOK
Benjamin Franklin once said that “Energy and persistence conquer all things.” This 200+ year-old quote by one of our nation’s most-storied founding fathers echoes the remarkable resilience of global equity markets during the second quarter of 2026.
Equities advanced robustly during the quarter in the face of extraordinary geopolitical disruption, a decisive shift in central bank posture, and an ongoing recalibration of the artificial intelligence investment thesis. Markets did not advance because the obstacles disappeared; they advanced because earnings momentum and investor resilience proved strong enough to overcome them. The “energy” that fueled this persistence came from the continued force of the AI investment cycle and the broadening of market leadership. While the quarter will be remembered primarily for the Iran-Israel conflict and its cascading effects on energy prices and inflation, the equity market story is more nuanced than headlines suggest.
Geopolitical Shock and Equity Resilience
The U.S.-Israel military strikes on Iran that began in late February continued to cast a shadow over the markets at the outset of Q2. The closure of the Strait of Hormuz drove Brent crude from approximately $72 per barrel to a four-year intraday peak of $126 on April 30th. The International Energy Agency described the disruption as the "greatest global energy security challenge in history," with an estimated 600–700 million barrels of cumulative production lost.
For equities, the impact was severe but ultimately transient. Artificial intelligence remained the dominant theme, and the Iran war continued to take a backseat. Markets demonstrated a striking capacity for recovery: a ceasefire announcement in April catalyzed the rebound in global equities, as measured by the All-Country World Index (ACWI), of roughly 15% in the most recent three-month period, recovering robustly from its March trough.
The remarkable pivot in global equities underscores a critical lesson: markets priced the geopolitical shock as a temporary supply disruption rather than a structural break in corporate profitability. That said, markets were mixed in Q2’s final days with global risk sentiment showing some weakening. Late-quarter selling in semiconductor and memory stocks was driven largely by positioning and market concentration concerns, while actual fundamentals remained solid. Those concerns were largely offset by strong earnings reports and guidance, which reinforced confidence in the AI capital-expenditure cycle and sustained memory demand.
Rotation was another defining theme amid a broadening-out trade lifting cyclicals (industrials, banks, homebuilders) as investors expanded beyond Big Tech names.
The Fed's Hawkish Turn
The energy shock caused by the conflict in the Middle East reignited inflation concerns across the globe, prompting a notable shift in central bank policy during Q2. At its June 17 meeting—the first chaired by Kevin Warsh, who succeeded Jerome Powell in May—the Federal Reserve held its policy rate steady but sent an unmistakably hawkish signal. Inflation projections were raised sharply, with headline PCE (personal consumption expenditures inflation) now projected at 3.6% for year-end 2026. It’s worth noting that a delayed impact from higher crude oil prices was a key factor in higher PCE inflation during the quarter. Meanwhile, the Bank of England also held its rate steady throughout Q2. Central banks in Europe and Japan were slightly more hawkish as they raised their rates to mitigate inflationary risks driven by energy price shocks.
The collective shift is consequential for equities. Higher-for-longer rates compress valuation multiples, particularly for long-duration growth stocks, and raise the hurdle rate for capital allocation decisions. Also, less certainty from The Fed will likely mean more volatility for equity markets. The quarter's late-stage tech sell-off may be an early reflection of this repricing.
The AI Trade and Broadening Leadership
Yet, we think it would be premature to declare the end of the AI trade. The technology-heavy Nasdaq Composite Index’s nearly 13% year-to-date gain through June 30th—driven in part by AI momentum—demonstrates that the market still rewards AI-exposed companies that deliver results. Moreover, the Magnificent Seven are still expected to deliver 14% year-over-year earnings growth for Q2, making them the largest contributors to earnings in the S&P 500 index. We believe highly disciplined, discerning stock selection within the AI ecosystem matters more than ever.
An important market development is the broadening of sector leadership, a rotation we view as healthy. Our observation is that this shift is related to the AI theme.
n every relevant sector, AI-exposed stocks have outperformed non-AI related ones. Technology and Industrials, the most exposed sectors to AI, continued to outperform. A market dependent on a handful of mega-cap names for its returns is inherently fragile. The valuation reset in growth stocks, combined with the broadening of earnings contributions, creates a more durable foundation for the next leg of the equity cycle—provided the macroeconomic backdrop cooperates.
During the quarter, we made portfolio changes that reflect our view on this broadening participation, particularly in cyclical and international stocks which are poised to benefit from the expansion of the AI infrastructure investment boom, including industrial automation, electrification, and data center buildout. While we believe the AI theme will continue to be a market catalyst in the medium term, the new additions we’ve added to portfolios reflect our effort to diversify into long-term growth stories beyond AI.
In sum, Q2 2026 was a quarter that tested the thesis that equities can climb a wall of worry. They did—even as the wall grew taller. The late-quarter pullback in tech, the Fed's hawkish turn, and the unresolved nature of the Middle East conflict suggest that the path ahead will require both selectivity and patience. We remain constructive on equities for the medium term, but we believe the easy gains of the AI-driven rally are behind us. The next phase should reward fundamentals over narratives, and breadth over concentration.
As always, we remain focused on building portfolios that can participate in long-term growth while remaining resilient through inevitable periods of volatility. We appreciate your continued trust and welcome the opportunity to discuss your specific objectives and allocation.
Impact Update
Q2 2026 was an active quarter—we published our 2026 Impact Report and Technology and Human Rights stance, co-filed a shareholder proposal at Microsoft, presented statements at Alphabet and Home Depot annual meetings, and joined investor coalitions on defense sector human rights, autonomous weapons, and charitable giving protections. Across proxy season, policy advocacy, and coalition work, we pressed for governance frameworks that keep pace with the real-world consequences of how technology, capital, and corporate infrastructure are deployed. We remain engaged, and Q3 is already in motion.
To read more, see http://www.zevin.com/news-views/q2-2026-impact-update
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