07.21.2026
Second Quarter 2026: Market and Economic Commentary
The following commentary presents our assessment of global economic conditions and financial market dynamics as of Q2 2026.*
Market Commentary
1. 1H 2026 Performance Summary
Market performance broadened considerably in the first half of the year. Since the launch of ChatGPT in November 2022, much has been made of a handful of large-cap U.S. technology names carrying the market. The defining characteristic of the first half of this year was a reversal of that trend — a welcome, healthy development for the market. Value stocks outperformed growth stocks, international stocks outperformed U.S. stocks, and U.S. small-cap stocks outperformed U.S. large-cap stocks.
Major market index returns as of June 30, 2026 (periods over 1-year annualized) · Source: FactSet
The reasoning behind the market’s broadening is more nuanced than investors simply rotating out of the AI theme. Instead, a wider range of sectors and companies are now participating in the buildout and hype than in prior years. Due to the immense scale of hyperscaler capital spending — high-end projections now reach $10 trillion over the next several years1 — and the evolving nature of the AI buildout, more companies are entering the AI theme’s orbit. Most of value’s recent outperformance over growth has been driven by a handful of technology companies tied directly to hyperscaler capex. The same dynamic is evident internationally, where a small number of technology firms that benefit directly from hyperscaler capex have accounted for the majority of non-U.S. market outperformance.
2. Earnings
Historically strong earnings growth is driving the performance. Earnings growth estimates for 2026 for the S&P 500 grew from ~17% on April 1st to ~23% by June 30th. The estimate for 2027 now stands at ~17%. These are historically strong growth figures, and it’s rare for the market to sustain this type of earnings growth, as the chart below shows.
S&P 500 Total Return (YoY) vs. 12-Month Forward Earnings Growth (YoY), since 2000 · Source: Exhibit A, FactSet Research Systems Inc., Standard & Poor’s. Latest: 2026-07-06
The key question going forward is whether this pace of earnings growth can be sustained. Hyperscalers have largely exhausted free cash flow as a funding source and are increasingly turning to debt markets to finance their AI-related capital expenditures. The six largest hyperscalers have issued approximately $245 billion of bonds this year, up from $108 billion last year and just $17 billion in 2024.1 While these companies have yet to show signs of slowing down, funding the AI buildout is becoming more complex and capital-intensive, creating the potential for future pressure on profitability and earnings growth for the companies driving much of today’s earnings growth.
Exhibit 6: A generational transfer in free cash flow · 12m forward FCF of “hyperscalers” and semiconductor companies, $bn · Source: BofA Research Investment Committee. Hyperscalers = AMZN, GOOGL, META, MSFT, ORCL. Semiconductor companies = NVDA, MU, AVGO, & AMAT
3. Concentration & AI Ecosystem
Concentration is a defining feature of today’s equity markets, and AI isn’t helping. The top ten companies now represent ~40% of the S&P 500. It’s less known, however, that the U.S. market, as measured by the same metric, is the third lowest concentrated country index.2 Concentration has continued to build especially strong in Emerging Market countries, like South Korea and Taiwan, due to rapid growth in a handful of semiconductor stocks.
Because the frontier labs are still private companies, concentration is worse than the index weights suggest. In the first quarter, Alphabet, Amazon, and Nvidia accounted for roughly one out of every six dollars of earnings generated by the S&P 500. For Alphabet, Amazon, and Nvidia, gains from equity stakes in the frontier labs represented roughly 60%, 51%, and 27% of total profits in the first quarter, respectively.2 Meanwhile, much of the AI demand underpinning hyperscaler growth projections is also concentrated among the same handful of frontier labs.
With equities comprising a record share of U.S. household net worth, surpassing even real estate, and these companies representing an ever-larger portion of the AI ecosystem, it is not unreasonable to argue that the frontier labs are beginning to approach “too big to fail” status. Given the growing dependency and national security implications of the frontier labs, we expect government intervention and involvement to only pick up from here, adding a significant unknown variable to the equation in the coming years.
Meanwhile, the AI conversation shifted from capabilities to economics in the second quarter. In the first quarter, businesses and investors were enamored by the capabilities of frontier models. During the second quarter, however, attention shifted to the associated costs, leading many corporations to reassess their use. As a result, open-source models — more transparent and cheaper than their closed-source counterparts — gained real momentum. Most leading open-source models are developed by Chinese companies. They still trail closed frontier models from Anthropic and OpenAI, but that gap has become less consequential as affordability and efficiency gather precedence over cutting-edge performance. This is a trend worth watching, particularly given that frontier models remain heavily subsidized and are still several years away from achieving sustained profitability.
Economic Commentary
1. Geopolitics & Oil Prices
The price of oil defied expectations in the first half of the year. The conflict with Iran has taken many turns over the past few months, making it hard to project on the outcome with any sort of confidence. We do know, however, that the price of oil has defied expectations so far, reaching ~$120 in March but declining to ~$80 today.
Round Trip for Crude · Brent Crude, Dec 2025 – June 2026 · Source: Harbor Capital Advisors, Bloomberg, FactSet. As of 6/28/26.
China’s abrupt drop in oil imports may be the single biggest reason global energy markets absorbed the loss of Strait of Hormuz supply. Roughly twenty million barrels of oil passed through the Strait of Hormuz each day prior to the conflict, representing about 20% of global oil demand. A drawdown in inventories, demand destruction, and alternative pipeline routes all helped offset the disruption. However, perhaps the most important factor was a sharp decline in Chinese imports. China imported approximately 7 million barrels of oil per day in May, down roughly 4 million barrels per day from levels earlier in the year — a reduction roughly equivalent to the combined oil consumption of France and Germany.3
The immediate supply disruption has been manageable, but several tailwinds supporting the oil market may prove temporary. Countries across the globe are releasing oil from strategic inventories, but those reserves can only cushion supply shortages for so long. U.S. crude inventories are now at their lowest level since 1983, and some energy analysts fear minimum operating levels could be reached later this year.4 Meanwhile, China is unlikely to maintain its recent pace of reduced imports, and Ukraine’s continued attacks on Russian energy infrastructure are adding pressure to an already constrained market. Russia has recently banned diesel exports and is increasingly struggling to satisfy domestic demand.
2. Inflation, Employment & GDP
Recent progress on inflation has been encouraging, but higher energy prices could quickly complicate the picture. Headline CPI cooled to 3.5% year-over-year in June, while Core CPI slowed to 2.6%. Although both measures remain above target, the June report was a step in the right direction. Falling oil prices provided a meaningful tailwind, making the path lower for inflation less certain if energy costs begin to rise again.
The economy continues to thread the needle, with a stable labor force and GDP growth that remains resilient. The unemployment rate stands at 4.2%, still near the 4% level that is often associated with full employment. Consumers continue to show resilience, although wage growth and inflation, both running around 3.5%, are now offsetting each other. GDP growth has remained solid at just above 2%, increasingly supported by business fixed investment — most notably the ongoing AI infrastructure buildout.
1 Goldfarb, Sam. (2026, July 13). The Quarter-Trillion-Dollar Onslaught of AI Bonds Is Testing Investors’ Limits. The Wall Street Journal.
2 Cembalest, Michael. (2026, June). Semiquincententacles: The US Grip on Markets on the 250th Anniversary of the Declaration of Independence. Eye on the Market | Special Edition. J.P. Morgan Asset & Wealth Management.
3 Blas, Javier. (2026, June 11). Ten Reasons Oil Is Still Below $100 a Barrel. Bloomberg Opinion.
4 Eaton, Collin. (2026, July 9). The Global Oil Market Isn’t Ready for the Iran Ceasefire to End. The Wall Street Journal.
*This material is intended for informational purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities to any person. This material may contain estimates and forward-looking statements, which may include forecasts and do not represent a guarantee of future performance. This information is not intended to be complete or exhaustive and no representations or warranties, either express or implied, are made regarding the accuracy or completeness of the information contained herein. Certain economic and market information contained herein has been obtained from published sources prepared by other parties, which in certain cases may not have been updated through the date of the distribution of this document. Except where otherwise indicated, the information contained in this presentation is based on matters as they exist as of the date of preparation of such material and not as of the date of distribution of any future date. The opinions expressed are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. Past performance is no indication of future results.