Summer 2026 Market Commentary
By Marc Usem and the Affiance Financial Investment Committee
Chip Stocks Drive Q2
The S&P 500 jumped 14% during the second quarter in a sharp reversal, after sliding -4% in the first quarter as hostility in the middle east erupted. The S&P 500 ended the first six months with a 9% total return. Chip stocks were the main drivers of Q2 stock market performance as the AI trade expanded and the memory required for data center storage became scarce. Sandisk (+258%), Micron (+241%), and Western Digital (+136%) jumped on full order books and sold out inventory, leading to significant earnings upgrades. Microprocessors were included in the Q2 rally, with Intel gaining 216% and AMD gaining 185% during the quarter. We note that prior market leaders have lagged this year, with Meta sliding -7% and Microsoft down -20%.
International stocks moved higher by nearly 10% in the quarter, but lagged domestic equities. Emerging markets were the clear winner jumping nearly 26%, driven largely by chip stocks located in Taiwan and Korea. China, which has historically been a driver of emerging market gains, has lagged in 2026. The basket of Chinese stocks in the iShares emerging markets ETF is down by -15%.
Clearly, diversification remains critical as market dynamics change globally and leadership changes over time. Diversification has become more complicated as major market indexes, once prized for their diversified portfolio of stocks, are increasingly driven by the largest companies. The top 10 stocks in the S&P 500 now stand at a record 40% of the index weight, up from 19% in 2015. In comparison, between 1990 and 2015 the range was 18% to 23%. Adding to the concentration issue are IPOs of some of the largest private companies to go public in history. The recent SpaceX IPO was valued at a record $1.77 trillion, which would make it one of the top 10 companies in the S&P 500 if it were included today. On deck are IPOs for AI firms OpenAI and Anthropic, which could also land in the top 10.
This year’s stock market gains have been supported by strong earnings growth. Earnings for the S&P 500 are estimated to have grown by about 20% on a year-to-year basis during the first two quarters, while the index is only up 9%. This means the price/earnings (P/E) ratio has actually declined, even though the market has advanced. Full year 2026 earnings are expected to increase by about 22%, providing fundamental support for continued stock market gains without P/E ratio expansion. At the same time, we know that volatility is likely, especially as we approach mid-term elections in November.
While strong corporate earnings have supported stock market gains, the new Federal Reserve chairman Kevin Warsh has surprised some investors as being more hawkish than expected. He has emphasized the importance of reducing inflation, which remains higher than the Fed’s 2% target. The latest CPI inflation report shows a 4.2% increase when including the impact of higher energy prices. Removing the more volatile food and energy prices, CPI was still up 2.9% from the prior year. While energy prices have now abated due to the Memorandum Of Understanding with Iran, the likelihood of a Fed rate cut has been replaced with the likelihood of a rate increase during the year. The employment picture has also continued to improve making the Fed’s dual mandate of price stability and full employment more manageable. The unemployment rate has stabilized in the low 4% range, with payrolls expanding in 5 of the past 6 months.
The earnings and economic backdrop remain favorable for continued stock market gains this year, driven by the race to build out AI infrastructure. We believe the hardware and physical infrastructure (permits, roads, sewer, water, and power) required for AI expansion is gated by the rate at which semiconductor production can be scaled and resources can be allocated. This means the buildout will take time, allowing for ongoing proof of concept and profitability measures to be realized while potentially keeping valuations and expectations more reasonable.
In the meantime, we will remain focused on the things we can control including our disciplined investment processes designed to provide tax-efficient, globally diversified portfolios that suit our clients’ investment planning needs.
Thank you for your continued confidence in our work.
Sources: Opening Bell Daily, InvestSnips, BlackRock, RBC, Yardeni, Capital Group, Council on Foreign Relations, NC State University, U.S. Bureau of Labor Statistics, FRED, Trading Economics, U.S. Census Bureau, CNN, CME Group
The views represented in this commentary are not meant to be construed as advice, testimonial or condemnation of any specific sector or holding. Investors cannot invest directly in an index. Unmanaged indexes do not reflect management fees and transaction costs that are associated with some investments. Different types of investments involve varying degrees of risk. Past performance and detailed processes do not guarantee future results. Please remember to contact Affiance Financial if there are any changes in your personal/financial situation or investment objectives. Asset allocation, rebalancing, and diversification will not necessarily improve an investor’s returns and cannot eliminate the risk of investment losses.
