Stocks continued their trek higher in the first half of 2026, despite several major twists and turns. The year’s quiet start belied the war and energy shock yet to come, followed by a strong AI-led tech rally before the market paused, took a breath, and began to broaden out. At the year’s halfway point, the S&P 500 was up a hard-won 10.2%. Here’s a look at the key events and market trends that shaped this 2026 stock market outlook.
First-Half 2026 Market Performance
The first two months of the year began serenely enough. The market methodically inched higher as optimism tied to artificial intelligence (AI) and expectations of Fed rate cuts led to early gains. The S&P 500 was up 0.7% through the end of February, but the impressive gains occurred overseas as the EAFE Index (a broad international index) was up 9.9% and emerging markets were up 14.7%. This was a continuation of 2025 when international equities outperformed the U.S. by a considerable amount.
Everything changed when the war in Iran began. Soon after the U.S. and Israel launched military strikes on Iran, the Iranians blockaded the Strait of Hormuz, a vital shipping lane for global energy supplies. This sent commodity prices soaring. The price of brent crude went from $72/barrel on February 27 to $112 on March 20. Consumers felt the pinch as gas prices rose, as did overall inflation. The latter led to doubts that the Fed would cut interest rates anytime soon. The market retracted strongly, with the S&P 500 falling 5.0% in March. Notably, EAFE lost 10.3% and emerging markets fell 13.1% in the same period. Foreign countries are much more dependent on oil flowing through the Strait of Hormuz, so the blockade weighed heavily on their markets.
In early April, rumors of a possible reduction in hostilities began circulating and everything turned on a dime yet again. The reprieve eventually materialized in the form of a two-week ceasefire beginning on April 8. The news triggered a furious relief rally as concerns over an escalating conflict and a prolonged shortage of oil eased. All the while, corporate earnings kept beating market expectations. According to Ned Davis Research, 85% of S&P companies beat consensus estimates, making it the third highest beat since 2001. In addition to healthy corporate profits, better-than-expected employment data dispelled recession fears as the consumer continued to spend. It was clearly a risk-on environment where the highest risk names performed the best: technology in the U.S. and emerging markets internationally. During the April-May rally, the S&P 500 was up 16.3%, which pales next to 25.4% for emerging markets and 43.7% for the S&P Technology Select Sector Index.
The first half of 2026 ended with a whimper as stocks traded mostly sideways in June. Technology cooled off, returning -0.1% for the month, which caused the S&P 500 to give back 0.9%. The news flow was filled with a mix of good and bad developments, making the consequences difficult to assess. News of constructive peace negotiations and the likely reopening of the Strait of Hormuz were encouraging developments, but contradictory comments from Iranian leaders subsequently cast doubt on whether the conflict was nearing its end. Oil prices plummeted roughly 20% in June, temporarily easing inflation fears, but actual inflation data remained rather high, providing little hope that the Fed would lower interest rates in the near term.
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Market Performance by Asset Class
All things considered, the good news is that stocks did well in the first half of this year. But the 10.2% return for the S&P 500 tells only part of the story as other parts of the market outperformed U.S. large caps. Technology was the star in the U.S., returning 32.7%. Given that the S&P 500 is now almost 40% technology, continued outperformance in tech should mean all equity portfolios participate. REITs, a great diversifier from the AI-technology trade, returned 14.5% as corporate real estate fundamentals continued to look appealing. Small-cap stocks, as represented by the Russell 2000, returned an impressive 22.6% in the first half of 2026. Strong earnings combined with historically cheap valuations led to strong returns. Outside the US, emerging markets returned 23.9% as robust growth in these developing economies was recognized. A big question going forward is will the rotation into small-cap stocks and international stocks continue? Typically, stocks trade in multi-year cycles which would lead one to believe that there is still more room for this trend to run.
2026 Stock Market Outlook: Where Do We Go From Here?
So, where do we go from here? Typically, stocks do not do well in mid-term election years. The market hates uncertainty and elections are the definition of uncertainty. On top of that, we must endure campaign ad season, which brings out the worst in everyone. Still, the economy seems resilient and if a cease fire can hold up and oil prices remain under control, there is hope the gains will continue. Despite the strong first half, much of the market remains reasonably priced. Technology stocks, coming off an incredible quarter, look to be the most vulnerable for a pullback based on valuation. Thus, we continue to preach diversification. There is nothing wrong with having positions in technologies that will change the future, but it is prudent to keep in mind that everything has a fair price, and these companies may be trading at levels well above their fair price.
Lastly, we cannot forget about fixed income. Bonds were positive in the first half, albeit barely (the Bloomberg US Agg Bond Index was up 0.62%). This return does not sound exciting, but the index is yielding over 4.7%. This yield is attractive and should allow bonds to be a good diversifier as well as a ballast for the accounts. Should equities retrench (not our base case), bonds have the potential to produce positive returns to help mitigate the pain. We believe the benefits of diversifying your U.S. large cap and technology positions will continue to pay dividends.
Sources: Morningstar, Ned Davis Research
