Earnings Growth, A U.S./Iran Ceasefire and a Strong Economy Send Stocks to New Highs

Markets staged an impressive rebound in Q2, as strong corporate earnings and rising hopes for a U.S./Iran ceasefire pushed the S&P 500 to new all-time highs.¹

The first good news came early in Q2: a U.S./Iran ceasefire announced on April 7, sending oil prices lower and helping stocks recover from March's geopolitically driven losses.² However, the real driver of the April rally was first-quarter earnings, with S&P 500 earnings growth reaching about 15%, nearly double the long-term average.³ AI-linked tech companies led the way on strong data center demand, but the strength was broad, with more than 80% of companies beating estimates.⁴ Together, earnings growth and the ceasefire fueled the rebound.

Market gains accelerated in May, supported by the same two forces as in April: strong earnings and hopes for a U.S./Iran ceasefire. Although fewer companies reported results in May, the reports were just as strong. Nvidia, Intel, Dell, and Snowflake all posted results confirming robust demand for AI infrastructure. Tech led again, but the strength was broad: Walmart's solid results eased concerns that higher prices were hurting consumers.⁵ Surging demand for data center components, including memory chips, pushed certain tech stocks sharply higher through month-end,⁶ and the S&P 500 set multiple new all-time highs.⁷ No formal U.S./Iran ceasefire was reached in May, but markets appeared confident that a major escalation was unlikely, so the absence of a deal didn't weigh on stocks.⁸

The rally continued into early June, initially on progress toward a U.S./Iran ceasefire, which President Trump and Iranian leaders signed in mid-June.⁹ Anticipation for the SpaceX IPO, the largest in history, also boosted tech and AI-related stocks,¹⁰ helping the S&P 500 reach another all-time high in the middle of the month.¹¹

However, mid-June also brought a surprise. New Fed Chair Kevin Warsh held interest rates steady, as expected, but his comments and the Fed's statement were viewed as more hawkish than anticipated, sharply increasing the odds of a rate hike later this year.¹² That shift caused some market volatility as investors adjusted to the new information. Still, stocks proved resilient as oil prices fell back to pre-war levels, easing concerns that the recent inflation spike would persist.¹³

Stocks remained resilient in the first half of 2026, as they did in 2025, despite several major macro surprises: a direct U.S./Iran war, oil prices reaching multiyear highs, an inflation rebound that shifted expectations from rate cuts to rate hikes, and growing doubts about AI's broad profitability. Although each surprise caused a temporary bout of market volatility, with the sharpest coming in March after the U.S./Iran war began, the effects were largely offset by two foundational bull market metrics: strong earnings and solid economic growth.

Outlook for the Third Quarter

Although the market and economy remained impressively resilient in the first half of 2026, that resilience should not create a false sense of security as we enter the second half of the year. Risks to the bull market remain.

First, expectations for rate hikes are rising. At the start of 2026, the market priced in one or two rate cuts for the year. Now, with inflation running hot, investors are pricing in one or two hikes instead, a significant reversal.¹⁴ That is not necessarily bad for stocks. However, the last time the Fed raised rates, in 2022, the S&P 500 fell roughly 25% from peak to trough.¹⁵ Higher rates increase borrowing costs and compress the valuations investors are willing to pay for future earnings, which is why the shift matters.

Second, exposure to AI investment remains a real risk. Hyperscalers are on pace to spend roughly $750 billion on AI infrastructure capex this year, up more than 80% from 2025. That spending is a meaningful driver of GDP growth and corporate earnings.¹⁶ If those companies begin to question the ROI on that spending, they could pull back sharply. Given how much of recent economic growth and market performance can be traced back to AI capex, any slowdown would affect both the economy and stocks.

Finally, the U.S. economy has been resilient, but it is not bulletproof. If inflation continues to rebound, it could weigh on consumer spending and the housing market. Consumer confidence already declined in May amid inflation concerns tied to the Middle East conflict.¹⁷ We are watching this closely. Stocks are trading at roughly 21 times forward earnings, above the 10-year average. At that valuation, the market is not pricing in any loss of economic momentum.¹⁸ A meaningful slowdown would leave little room for error.

Bottom Line

In sum, we enter the second half of 2026 with a strong market. Earnings growth is above historical averages, economic growth is solid, and enthusiasm for AI remains high. But the three risks outlined above are real: rising odds of rate hikes, exposure to AI infrastructure spending, and persistent inflation that could pressure consumer spending. Elevated valuations leave little cushion if any of these risks materialize. We will continue to monitor all three closely.

The first half of 2026 is also a useful reminder that markets rarely move in a straight line. Volatility, whether driven by geopolitics, Fed policy, or shifting AI sentiment, is a normal part of the cycle. Portfolios built around long-term goals are designed to weather these periods.

Our team remains dedicated to helping you navigate this environment and keep your financial plan on track. Please do not hesitate to reach out with any questions or to schedule a portfolio review.