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July 2026
The second quarter of most years tends to be a mediocre time for the stock market, and this contributes to the Wall Street adage “sell in May and go away.” Historical data shows that of the four quarters of the year, the second quarter is the next-to-worst performing period, with an average gain of 2.5% to 3.0% in the S&P 500.
However, the second quarter of 2026 broke the mold. In the period the S&P 500 recorded a gain of 14%, the Dow Jones Industrial Average rose 12.9%, and the Nasdaq Composite Index soared 19.6%. These were the best quarterly gains since the second quarter of 2020. As a refresher, stocks plunged in early 2020 in response to the global economic shutdown mandated due to the rapid spread of the COVID-19 virus, and the S&P 500 dropped 34% from its February 2020 peak to its March 2020 low, fell 12.5% in the month of March, and declined 20% in the first quarter of the year. In other words, the second quarter of 2020 brought a relief rally from a quick, but severe, bear market in the first quarter.
Solid Fundamentals and Good Liquidity
The S&P 500 lost 4.6% in the first quarter of this year due to the Iran conflict which triggered a major disruption in global oil supplies. But equities were surprisingly resilient in the face of numerous risks including worrisome inflation, the ongoing conflict between Russia and Ukraine, the instability and uncertainty in the Middle East, and the blockade of the Strait of Hormuz.
Although some believe the stock market has been dangerously complacent given these risks, we disagree. The resilience of the 2026 stock market is directly tied to good US economic activity and impressive earnings growth. In fact, while the S&P 500 is up 21% from the June 2025 close, S&P Dow Jones consensus data shows S&P Composite earnings are up an estimated 22% in the same time frame. In short, the US equity market continues to be driven by earnings.
Bubble? Yes or No?
Some strategists warn that the 2026 equity market is a bubble waiting to burst. Again, we disagree. Late-stage bubbles are driven by extreme optimism, record high ownership of equities, leverage, and overvaluation. This does not describe the 2026 market which has been driven by strong earnings. The S&P 500 price earnings multiple based upon 2026 estimated earnings was 21.9 times in December 2025 and was 21.8 times earnings at the end of June 2026.
In terms of equity ownership, the Investment Company Institute reported money market funds totaled $7.9 trillion at the end of June and Federal Reserve data shows total household cash and cash equivalents (which includes money market funds) was an estimated $18.4 trillion at the end of March. This means that household cash equates to roughly 29% of US market capitalization of $74.5 trillion. This ratio is up from 28% at the end of 2025. In terms of extreme optimism, a late June survey from the American Association of Individual Investors shows less than 45% of all investors are bullish while 36% are bearish. This remains well below the 55% to 60% bullish ratio seen at recent market peaks. In short, stocks do not appear to be overvalued or over owned and in fact, there is significant cash on the sidelines. Solid earnings performance and high cash balances are two of the factors that underscore our long-term bullish outlook.
Others have argued that the equity market is driven by a small number of large capitalization AI-related stocks. However, the Russell 2000 index, which includes small and medium-sized companies, is up 20.9% year-to-date, which is far more than the gain in the S&P 500 index of 9.6%. In short, equity performance is much broader than just AI-related stocks. Others worry that the datacenter and infrastructure buildout is generating an unprecedented wave of debt issuance. Hyperscalers such as Alphabet Inc. (GOOGL – $357.37), Amazon.com (AMZN – $238.34), Microsoft Corp. (MSFT – $373.02), and Meta Platforms, Inc. (META – $563.29) are expected to spend $700 billion in outlays this year. AI-related global debt issuance was nearly $236 billion as of May 2026, four times greater than the same period a year ago. This could become a negative for these companies if AI demand falters, but at present and the foreseeable future, this does not appear to be so.
Gail Dudack, Chief Strategist
PLEASE NOTE: Unless otherwise stated, the firm and any affiliated person or entity 1) either does not own any, or owns less than 1%, of the outstanding shares of any public company mentioned, 2) does not receive, and has not within the past 12 months received, investment banking compensation or other compensation from any public company mentioned, and 3) does not expect within the next three months to receive investment banking compensation or other compensation from any public company mentioned. The firm does not currently make markets in any public securities.
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