Markets Rebound as Earnings Drive Growth
From Pessimism to New Highs
The second quarter exceeded even the most optimistic investor expectations. Stocks hit their 2026 low at the end of March, setting April up to be one of the best months on record. The momentum carried into May, and while stocks experienced a modest pullback in June, Q2 2026 delivered the highest quarterly performance since 2020.
As we highlighted in last quarter’s newsletter, market performance in 2026 has closely resembled the same period of 2025, and second quarter of 2026 further solidified this observation. To recap, both Q1 of 2025 and Q1 of 2026 saw the S&P 500 decline exactly 4.3%. While Q2 2026 outpaced Q2 2025 with a gain of +15.2% versus +10.9%, respectively, both quarters began amid widespread investor pessimism and finished solidly in double-digit return territory.
We are not suggesting there is a mystical explanation for this market deja vu, but rather a very human one. In both cases, investors reacted to a dramatic geopolitical event and over-estimated the fundamental impact it would have on corporate earnings. Last year the concern was tariffs and this year it was oil prices, but in both years the actual impact of both has been minimal.
Thankfully, these periods of negative investor sentiment tend to be short-lived and ultimately it is profits that drive stock prices. Fortunately, S&P 500 earnings are at a record high and profit margins, a measure of how efficiently companies make profits, also hit a new high in Q1 2026. The rise has been driven by the highly profitable technology sector and a booming AI buildout, but there has also been a general improvement in corporate profitability across all sectors. In fact, it can be argued that difficult periods like the pandemic, tariffs, and energy price shocks have spurred corporate innovation and nimbleness, leading to more resilient businesses nowadays versus past eras where the geopolitical and economic backdrops were a bit more stable.
Looking ahead, we remain optimistic about the rest of 2026. The economy appears to be on solid footing, the labor market is stable, and energy costs appear to be ebbing, all of which should support continued earnings growth which is expected to hit +23% for the full year. If realized, this would be the fastest pace of earnings since the post-pandemic rebound in 2021. Despite an upbeat outlook, we would not be surprised to see bouts of volatility in the second half of 2026 as investors wrestle with questions surrounding inflation, interest rates, the AI-boom, and who will control Congress next year. Elevated volatility and lower-than-average equity returns tend to be the norm in midterm election years. In fact, since 1942, the S&P 500 has averaged only +1.3% from January 1st through election day during midterm years. The silver lining is that from election day until the end of June of the following year, the S&P 500 has averaged +15.4%. It would be nice if markets cooperated until election day, but we are cognizant that market momentum and investor sentiment can change very quickly. Should volatility reemerge, we would view it as an opportunity to adjust and rebalance portfolios, like any other period of volatility.
Asset Class Performance: A Standout Quarter
Stock Performance
The S&P 500 delivered a historically strong April followed by an impressive gain in May. June experienced a modest pullback of 1%, but for the full quarter, the S&P 500 gained 15.2%. As mentioned in the opening section, this ranks Q2 2026 among the top 10% of all quarters going back to 1970.
The NASDAQ also posted a historically significant quarter. It gained 15% in April, 8% in May, and lost 3% in June. For the full quarter, the NASDAQ gained 21.6%, the second strongest on record after Q2 2020 where it gained 31%.
Q2 returns were solid down the market-cap spectrum as the midcap index (S&P 400 Midcap) gained 14.5% while the small-cap index (Russell 2000) gained +21.5%.
Outside the US, developed international stocks gained 11% in Q2, a very solid return, and were positive in each month of the quarter which was a departure from Q1 where they lost 10% in March alone. The clear winner across all major stock indexes in Q2 was emerging market stocks, which gained 24% due to Taiwan and South Korea, whose stock markets consist almost entirely of AI-memory chipmakers which are having a banner year.
Bond Performance
While stocks surged in Q2, bond returns were subdued and earned slightly positive returns as interest rates ended higher than where they started the quarter (bond prices and interest rates are inversely related). The Bloomberg US Bond Aggregate index gained a modest 0.3% as the US 10-yr Treasury bond, a key interest rate benchmark, increased from 4.3% to 4.5%.
High Yield Corporate bonds gained 2% in the quarter, as high yield investors are less sensitive to risk-free interest rates (US Treasury bonds, for example) and more focused on the balance sheet health and earnings power of corporations, which improved in Q2.
Finally, municipal bonds gained 2.2% in the quarter as investors sought out tax-advantaged bonds, a welcome change after a period of modest performance stretching back to early 2025.
The Return of the IPO Market
A classic sign of a strong stock market is an increase in initial public offerings, or “IPOs”. In any market, stocks included, supply responds to demand. If investor demand is strong, as it has been in 2026, companies with privately held shares will look to the public stock market to generate cash from a new set of investors. This can help them fund growth and expansion, pay down debt, acquire other companies, and allow existing shareholders (particularly employees) to easily sell their shares. However, IPO activity can be temperamental, with flurries of heavy activity and long periods of low activity. Take 2021 for example, when $115 Billion of IPO proceeds entered the stock market as investors cheered continued monetary and fiscal stimulus spurred by the pandemic. Shortly after the year ended, however, the Federal Reserve reversed course and began raising interest rates to combat inflation caused by this stimulus. The S&P 500 proceeded to lose 18% in 2022 and the IPO market came to a screeching halt. Things improved slightly in subsequent years but only recovered to $38 Billion of IPO proceeds by 2025 - roughly one-third of the 2021 amount (see Fig 1).
IPO sentiment has improved considerably in 2026 as investors are embracing artificial intelligence and technology companies. Current estimates put 2026 IPO proceeds around $225b, an all-time high and almost double the 2021 figure.
For investors who are cautious when anything spikes this way, the good news is that the 2026 vintage of IPOs already appears to be much different than in past eras. The 2021 and dot-com IPO market was characterized by a flood of smaller, less mature, and frankly low-quality equity offerings, whereas 2026 appears to be the year of the “Megacap IPO”, characterized by a smaller number of large, mature companies that generally don’t have the “need” to IPO but rather a “want” to IPO. SpaceX, which raised $75b in June (for a $1.75 trillion valuation) is the first high profile example. Others set to IPO this year are OpenAI, Anthropic, Databricks, and Stripe.
Despite the increased scale and quality of companies coming to market, IPO investing is not for the faint of heart. Regardless of a company’s scale and reputation, volatility can be high and even large IPOs can struggle. In fact, the largest 9 IPOs of the last 20-years have returned -30% in their first year of trading as public companies (Fig 2). So, while we appreciate the essential function that IPOs play in financial markets, we are mindful of their historic volatility.
Fig 1.
Source: Factset, Goldman Sachs Global Investment Research
Fig 2.
Source: Y-Charts
Your Client Experience
While we continue to monitor developments in the markets, we also want to keep you informed about several important updates here at GSWM that will affect how you access and review your account information in the months ahead.
Last year we shared that our back office, Commonwealth Financial Network, had been acquired by LPL Financial. As part of the integration process, clients will begin to see enhancements to both client statements and a new client log-in experience which will replace Investor 360.
Beginning mid-November, Investor 360 will be replaced by a new and enhanced online client portal. The upgraded platform will offer a more seamless login experience, improved self-service capabilities, and convenient access through smartphone and mobile devices, allowing you to manage and monitor your accounts more efficiently. Clients will have a new website and app to log in to, along with a new user ID and Password.
In addition, you will notice a refreshed look to your monthly account statements, with a redesigned format intended to make reviewing your investment information easier and more intuitive, featuring a streamlined account summary, expanded account details, and asset allocation breakdown.
As we approach the transition date, we will provide step-by-step instructions and additional information to help enable a smooth and seamless conversion. As always, if you have any questions or need assistance, our team is here to help and guide you through the process.