Markets Shrug Off a Volatile Backdrop
The second quarter of 2026 seemed to test investors’ resolve early, then reward their patience. Conflict broke out between the U.S., Israel, and Iran in late February, and fears of a drawn-out disruption to oil supplies pulled the S&P 500 Index down almost 8% by the end of March[1]. From there, though, the index staged a steady climb, crossing 7,600 for the first time on June 2 and marking its 24th new high of the year[1]. Neither the absence of a lasting peace agreement between the U.S. and Iran, nor a hotter-than-expected inflation print and rate uncertainty, was enough to knock equities off their gains into quarter-end. [1].
By any measure, the turnaround was notable. The S&P 500, Nasdaq, and Dow each posted double-digit gains in the second quarter alone, up 14.9%, 21.4%, and 12.9% respectively, ranking among their best quarters in years[1]. By the end of the first half of the year, the S&P 500 was up 9.6%, while global equities broadly, as measured by the MSCI ACWI, gained 11.25%[2],[1]. Notably, this strength came with what appeared to be unusually low turbulence: the VIX finished the quarter under its historical average and the deepest drawdown of the year topped out at 9%[1]. Non-U.S. markets kept pace too, with developed international equities up 7.7% and emerging markets climbing an impressive 22.7% for the half[1].
Earnings, Not Sentiment, Are Driving This Market
The more encouraging story underneath the headline numbers may be from where the gains are coming. Corporate profits, not multiple expansion, have carried this rally. First-quarter earnings for the S&P 500 came in at nearly 29.4% growth year over year, roughly double the 14.4% pace analysts had penciled in back in April[3]. Second-quarter results are beginning to roll in and are expected to show growth of about 23.4%, well ahead of the 15.2% forecast at the start of the year[3]. The technology sector remains the standout, with profit growth projected near 65.5%, while energy companies are seeing an even sharper jump, up roughly 115%, thanks to higher oil prices[3].
Interestingly, we believe valuations have become more reasonable even as prices climb, because earnings expectations have risen even faster. The S&P 500’s forward price-to-earnings ratio sits at 20.1, down from 22.2 at the close of 2025[3]. That’s a healthier dynamic than a rally built purely on investors paying more for the same dollar of earnings, but it does mean companies now have less margin for disappointing guidance heading into the back half of the year[3].
AI Spending Is Reshaping the Power Grid
A large share of this earnings momentum traces back to how aggressively companies are building out AI infrastructure. In the first quarter, business investment overtook consumer spending as the leading driver of U.S. GDP growth, a shift that hasn’t happened in years, with spending on computers and related equipment expanding at a 67.4% annualized clip[1]. Wall Street has taken notice. Expected 2027 capital budgets among the fourteen largest publicly traded data center operators jumped 56% between August 2025 and February 2026[4].
What began as chip enthusiasm is quickly becoming a power story. The International Energy Agency now expects U.S. data center electricity use to nearly double this decade, rising from roughly 224 terawatt-hours in 2025 to 426 terawatt-hours by 2030[4]. Federal energy forecasters project that businesses will draw more power than households for the first time on record[1]. Natural gas, solar, and nuclear generation, including small modular reactors built close to data centers, all stand to benefit as usable grid capacity becomes an increasingly scarce and valuable asset[4]. A financing gap for infrastructure has persisted in much of the world for years, and we believe AI’s growth will only widen it, making infrastructure an increasingly compelling investment.
Inflation Is Sticky, and the Labor Market Is Softening
Away from stocks, the economic picture was more mixed. Consumer prices rose 4.2% year over year in May, still running well above the Fed’s comfort zone, with energy costs continuing to add pressure[5]. Hiring, meanwhile, has slowed noticeably. Employers added just 57,000 jobs in June, far short of the roughly 115,000 economists had expected, and prior estimates for April and May were revised down by a combined 74,000 jobs[6]. Unemployment actually edged down to 4.2%, but that mostly reflects fewer people looking for work rather than stronger hiring[6]. With inflation still elevated and the labor market cooling at the same time, the Federal Reserve has had little incentive to move rates in either direction so far this year[7].
Looking Ahead
The first half of 2026 showed that markets can look past real disruptions, an active war, an energy price spike, and a softening jobs picture when earnings deliver. The tradeoff is that expectations are now higher, leaving less cushion for companies as second-quarter results come in over the next several weeks. We continue to see value in staying diversified, including maintaining exposure to the real assets and infrastructure that stand to benefit as the AI build-out increasingly becomes a question of power, not just processing, though these investments carry their own risks, including sensitivity to interest rate changes, regulatory and permitting uncertainty, and volatility in energy prices, and may not be suitable for every portfolio.
Disclosures:
This blog is created and authored by BSW Wealth Partners, Inc., a Public Benefit Corporation (“BSW”) and is published and provided for informational purposes only. The opinions expressed in the blog are our opinions and should not be regarded as a description of services provided by BSW or considered investment, legal or accounting advice. Certain information sited is from third-party sources and while we believe the information to be accurate and true to the best of our knowledge, we cannot guarantee its accuracy as there may be certain unknown omissions, errors, or mistakes. Use of third-party information, including links, is in no way an endorsement by BSW. References to third-party forecasts, projections, or opinions are for informational purposes only. BSW has not independently verified such information and makes no representation as to its accuracy or completeness. This commentary contains forward-looking statements that reflect current views and are subject to risks and uncertainties. Actual results may differ materially. The views reflected in the blog are subject to change at any time without notice. Nothing on this blog constitutes investment advice, performance data, or any recommendation that any security, portfolio of securities, investment product or investment strategy is suitable for any specific person. Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by BSW), or any non-investment related content, made reference to directly or indirectly in this blog post will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Not all BSW clients will have the same experience within their portfolio(s) and certain topics discussed in this blog may not apply to all clients or investors. Index returns shown are for illustrative purposes only, are unmanaged, do not reflect fees or expenses, and are not available for direct investment. BSW client results will differ. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from BSW. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. BSW is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of BSW’s current written disclosure statement discussing our advisory services and fees is available upon request.
Investors should be aware that real estate investments carry significant risks including: illiquidity, concentration risk, leverage risk, interest rate sensitivity, economic cyclicality, and the potential for loss of principal. Investors should also understand that private equity investments carry substantial risks including: illiquidity, leverage risk, concentration risk, valuation uncertainty, lack of transparency, limited regulatory oversight, and the potential for total loss of invested capital. Private equity is suitable only for investors who can bear such risks and tolerate long investment horizons without access to capital. Bond investments carry risks including interest rate risk, credit risk, and the potential for loss of principal.
—
[1] https://legacykc.com/market-commentary/market-commentary-july-2026/ [2] https://www.msci.com/documents/10199/255599/msci-acwi-net.pdf [3] https://www.reuters.com/business/higher-bar-corporate-profit-growth-poses-challenge-us-stock-market-rally-2026-07-09/ [4] https://www.alpsfunds.com/hubfs/alps-docs/lit/wp/electrification-of-everything-wp.pdf [5] https://www.bls.gov/news.release/archives/cpi_06102026.htm [6] https://www.bls.gov/news.release/archives/empsit_07022026.htm [7] https://economics.td.com/us-employment
