As America celebrates its 250th birthday this Fourth of July, I find myself reflecting on another milestone celebration of the nation's Bicentennial in 1976.
Growing up in Yonkers, NY, I vividly remember the anticipation leading up to our country's 200th birthday. New York Harbor was filled with some of the world's largest tall ships, neighborhoods proudly displayed patriotic decorations, and many of us, even on my own street painted fire hydrants red, white, and blue with stars and stripes. Like countless families across the country, we celebrated with bottle rockets, Roman candles, and other backyard fireworks that lit up the summer sky.
Fifty years later, the financial markets delivered a fireworks display of their own. Double digit returns were recorded for many equities markets including the best quarterly gains for the S&P 500 and Nasdaq Composite since the 2020 post-pandemic rebound. Drivers included strong corporate earnings and the announcement of an Iran War ceasefire which aided a return of oil prices back toward pre-crisis levels. 85% of S&P 500 companies beat consensus earnings expectations for the first quarter, the most since 2021 driven in a large part by artificial-intelligence related stocks. Higher corporate earnings actually caused the forward P/E multiple of the S&P 500 to compress from 22x at the start of 2026 to 20x by quarter end.
Small cap stocks (as measured by the Russell 2000) returned 21% eclipsing the S&P 500 return of 15%. Many International equities also had strong results led by 24% gain in the MSCI Emerging Markets Index also fueled by technology stocks. Fixed income performance was more modest (the Bloomberg US Aggregate Index returned .7%) as persistent inflation concerns reduced the likelihood for interest rate cuts in 2026. High yield bonds fared somewhat better with the ICE BofA High Yield Index returning 2.5%. While the Federal Reserve held rates steady at the end of the quarter, Fed officials signaled that rates could rise by the end of the year with the bond futures market pricing in at least one rate hike for 2026. Overall, as we begin the third quarter, yields across many fixed income investments have become more attractive.
We remain constructive on the backdrop for equities as 2026 aided by strong corporate earnings and resilient economic growth. At the same time, it's important to recognize that investor expectations have risen alongside markets. This combined with persistent inflation and the upcoming uncertainty leading up to the US midterm election may contribute to increased market volatility for the second half 2026. We remain committed to helping our clients navigate both the opportunities and the challenges that lie ahead with discipline, perspective, and a long-term focus.
Sources: FactSet, Morningstar, The Wall Street Journal, JP Morgan Guide to the Markets, Charles Schwab & Co.
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