Q2 2026
Dear Client,
We hope you all had a pleasant Independence Day weekend! Our summer thus far has been quite pleasant (except for the smoke caused by nearby forest fires). We have been spending time riding bikes, hiking, swimming, and visiting with friends and family. This time of year tends to slip by as people vacation, markets are slower, and hopefully we all are enjoying a bit more time outside. That said, it is never a bad time to check in on your finances. If you would like to discuss your accounts, your financial plan, or any upcoming changes to your financial situation, please reach out to schedule a time for a call or meeting.
The quarter we just finished was remarkably strong from a market return perspective. Partly that was due to timing; the rebound from the initial Iran war sell-off coincided almost perfectly with the start of the quarter. It also did have fundamental underpinnings, as the earnings results from the first quarter were quite strong. Actual index changes during the quarter were as follows (calculated from www.stockcharts.com):
S&P 500 change: 14.38% Q2, 9.03% for the first half of the year (H1)
S&P 500 Equal Weight Index change: 10.9% Q2, 11.11% H1
Nasdaq Composite change: 20.56% Q2, 11.64% H1
Nasdaq Composite Equal Weight Index change: 23.46% Q2, 18.35% H1
Dow Jones Industrial Average change: 12.77% Q1, 8.76% H1
Ten Year Treasury Yield change: 2.91% Q2, 6.18% H1
Light Crude Oil Spot ($WTIC) change: -31.68% Q2, 21.06% H1
Gold Spot ($GOLD) change: -14.21% Q2, -7.83% H1
Takeaways Include:
· Extremely strong rebound across the various indices, but especially for the Nasdaq
· Further breaking down the Nasdaq, the semiconductor portion (SOX index) was up 85.5%.[i] This was a departure from the largest few stocks dragging up the index and shows in the outperformance of the Nasdaq Equal Weight
· Somewhat similarly, the S&P Equal Weight beat the market cap weighted S&P for the first half (although it underperformed for Q2)
· The strength of the Equal Weight versions of the Indices shows the relative strength of the smaller stocks in the indices, or put another way, the performance was more balanced than in previous quarters/years
· Predictably, oil fell as the Iran War tensions were reduced from a boil to an uneasy simmer
· Gold fell during the quarter, seemingly showing relief at reduced tensions, and reduced inflation expectations
As we write, there is yet another headline crossing about commercial ships being fired on in the Strait of Hormuz. We consider the situation in Iran far from resolved, and we see no clear or easy path to resolution. The question for the investor is the extent to which it disrupts global energy supply and the flow of commerce. We will continue to monitor the situation, and do our best to understand and adjust to the impacts. [ii]
In our Q1 letter we discussed the likelihood of recession being incited by a spike in the price of oil. The historical analysis showed that the relevant metrics had to do with the duration and magnitude of the spike. It seems the uneasy truce that has developed currently has been enough to convince the oil market that things are heading in the right direction. As a result, the conversation has mainly turned to whether or not the increase in inflation we have seen is truly transitory, and the exceptionally strong earnings companies have been reporting.
In short, the dissonance between geo-political issues, and economic strength has thus far continued to favor the positive economic news.
The S&P 500 reported earnings growth of 28.6% for Q1, and the estimate for Q2 (as we begin reporting season) is for another 23.3%. Clearly those are very strong numbers, and as a result, the Price/Earnings ratio of the index has increased only 2%[iii] since Q1 despite the 14% increase in price level. So, although prices have increased, the valuation at the index level has remained roughly steady.
We have been impressed by the continued strength of earnings, and the resulting strength in the markets. As such, we have continued to look for opportunities to invest in great companies at good prices. The increase in short term interest rates during the quarter also offered the opportunity to reinvest in short term treasury notes at favorable rates as some older bonds matured.
The evolving market environment, especially as we move into the mid-term elections, should continue to keep us on our toes. We will keep working hard to decipher the information flowing through the news and markets to your advantage.
We hope you all enjoy the rest of the summer season and trust you will give us a call or email if you want to discuss any of the above in more detail.
Take care, Bo and Lesley
[i] Also calculated from www.stockcharts.com
[ii] Unfortunately, the situation seems to be further deteriorating as we work toward sending this note
[iii] On 04/01/26 the forward P/E ratio for the S&P 500 was 19.7, and as we begin Q2 the forward P/E ratio sits around 20.1
