- Stocks recorded incredible gains and set new all-time highs after a difficult start to the year.
- Market rotation continued, further elevating long-time laggards to today’s strongest performers.
- Gasoline prices remain high, contributing to a recent spike in inflation.
An Incredible Rebound
After a challenging start to the year, U.S. stocks achieved one of their strongest periods of performance in recent history. Each of the four primary U.S. stock market indices posted stellar double digit returns in the second quarter. These included the S&P 500 up 14.05%, the Dow Industrial Average up 11.19%, the Nasdaq up 20.02% and the Russell 2000 up 20.38%. Emerging markets also enjoyed an incredible upswing of 18.2% during the second quarter.
Yet again, stocks defied headline risks. In fact, each of the indices noted above reached new all-time highs despite facing geopolitical risks, high energy costs, and rising inflation. Additionally, there’s been wide market participation as compared to years when only a few companies supported returns. This year’s strong performance extends to various sectors of the economy, diverse sizes of companies, and numerous countries.
A summary of year to date returns as of June 30th are as follows:
Bloomberg U.S. Aggregate (U.S. bonds) 0.62%
S&P 500 Index (large U.S. stocks) 9.55%
Russell 2000 (small U.S. stocks) 21.86%
MSCI All Country World Index ex-US 13.68%
(International Stocks)
Interestingly, the investment events and performance of 2026 offer several perfect examples that support the investment principles we follow. Namely, these include focusing on investment fundamentals, owning a diversified portfolio, and maintaining a disciplined approach.
Principle #1: Focus on Investment Fundamentals
While many people focused on worrisome headlines that extended into the second quarter, stocks followed a more optimistic path. Prices rallied in response to positive investment fundamentals. Investment fundamentals include qualitative and quantitative factors, offering a more precise approach to determining investment values as compared to news headlines. Key fundamental factors that drove prices higher in the second quarter include:
- Oil prices fell precipitously.
- Stock earnings expanded widely for the second quarter in a row.
- AI continued to deliver intensive infrastructure spending and broad business productivity gains.
- Geopolitical tensions de-escalated.
Principle #2: Maintain Diversification
The benefits of diversification (owning investments in different segments of the markets) are seen virtually every year. While diversification is widely adopted, some investors gave up on U.S. small-cap value and emerging market stocks after extended periods of underperformance. Both have now entered a long-awaited market rotation, boasting the strongest returns of the year. Their turnarounds have been supported by several market advantages.
After nearly 15 years of underperforming the S&P 500, emerging markets staged an astounding comeback thanks to their undervalued prices, cheaper paths to technology, including AI, abundant natural resources, and the benefits a weakening U.S. dollar.
Similarly, after a grueling decade of small-cap value stocks underperforming the S&P 500, they are now leading the U.S. stock market. Similar to emerging markets, their lower valuation levels finally became attractive. Additionally, their larger concentration of domestic operations and sales have helped to mitigate the cost of higher tariffs and currency swings.
Investors who gave up on diversification and dispelled small-cap, international and emerging market stocks are now forfeiting the most handsome gains this year.
Principle #3: Remain Disciplined
The rapid second quarter market reversal and a descent of several high-profile investment darlings exemplify the importance of maintaining investment discipline. This includes not timing the markets and not chasing performance.
Don’t Time the Markets: April’s incredible market recovery offers a prime example of how investors have been repeatedly rewarded for maintaining a long-term investment approach versus selling into fear or trying to time the markets. Those who sold stocks during a volatile first quarter had a short window to re-enter the market before having to buy back at higher prices. As an example, the S&P 500 staged a dramatic recovery over only 15 days from March 30 to April 14.
Not all market recoveries happen this fast. However, quick and dramatic market rebounds are not an anomaly. Last year, we saw the markets boomerang within a matter of 9 days after stocks cratered when tariffs were announced on “Liberation Day.” Looking back further to 2020, stocks staged the most significant historical reversal from extreme market depths to new highs within a few months. These examples are not to say that every market downturn is short-lived. However, they do exemplify the risks of selling into fear. Doing so can hurt your long-term growth prospects.
Beware of Chasing What’s Hot: Recent large reversals among high-flying investments that have been the “rage” illustrate the perils of chasing investments. What’s hot today can easily turn cold. Dramatic runups in crypto currency, gold, oil, and the SpaceX IPO are perfect examples.
- As of June 30, Bitcoin had fallen more than 50% from its 2025 high.
- As of June 30, gold had fallen more than 28% from its 2025 high.
- Within 2026, crude oil skyrocketed more 70% over 40 days only to precipitously fall by nearly 40% in less than 2 months.
- SpaceX stock skyrocketed by more than 50% in its first 3 trading days but then plummeted over 4 days to just above its opening price, which it eventually fell to within a month.
What Might Lie Ahead
Thus far, 2026 has produced handsome returns, extending a three-and-a-half-year hot streak. There are many positive factors helping to bolster the market that could easily support additional gains ahead. Likewise, there are also meaningful risks that could pause or reverse market momentum. Inflation is notably high on the list. After years of seeing inflation decline and then level, the war in Iran has pushed gasoline and energy prices dramatically higher. Ups and downs in negotiations, ceasefires, and agreements keep geopolitical risks elevated. Rising debt levels and reliance on AI spending also present risks.
The stock market is enjoying strong growth. However, market ups and downs are inevitable. This is why SageVest embeds investment diversification and follows a disciplined approach. We are not loading up on stocks in hopes of consistent market gains, nor are we selling into any potential fear. Rather, we are ensuring your portfolio has exposure to a variety of stocks as well as bonds, which have historically mitigated losses during stock market downturns. Additionally, we are aligning your investment strategy with your personal needs for growth and income. These are the paramount factors in determining your appropriate investment positioning with the goals of increasing your wealth potential and protecting your security along the way.
SageVest Wealth Management
