2Q Investment Commentary: Fundamentals Fuel Broadening Market
BY PAUL BODNAR
CM Wealth CEO, Chief Investment OfficerFinancial markets delivered strong results during the second quarter as investors gained confidence in the durability of economic growth and corporate earnings. The S&P 500 gained 15.2% during the quarter, its strongest quarterly advance since 2020, while the Nasdaq returned 21.6%. International markets also participated in the rally, with the MSCI Emerging Markets Index advancing 24.2% during the quarter, making it one of the strongest performing major asset classes of 2026 thus far. Commodity markets experienced significant volatility as oil prices surged earlier in the year amid Middle East tensions before retreating as geopolitical risks eased and supply concerns moderated.
Perhaps the most important development was the broadening of market leadership. For much of the last several years, returns were dominated by the Magnificent 7 and a relatively small group of companies tied to artificial intelligence. That changed meaningfully during the second quarter as gains expanded across financials, industrials, healthcare, and other sectors of the economy. Roughly 85% of S&P 500 companies exceeded earnings expectations, and analysts raised overall quarterly EPS estimates by 3.4%, the most optimistic upward revision cycle since 2021. Together, these developments suggest earnings growth is becoming increasingly broad-based rather than concentrated among a handful of large technology companies.
Small and microcap stocks were among the biggest beneficiaries of this shift. The Dow Jones U.S. Small Cap Total Stock Market Index returned 24.7% during the second quarter, substantially outperforming the S&P 500's 15.2% gain. Over the trailing 12 months, the small cap index gained 44.3% compared to 22.3% for the S&P 500, nearly doubling the return of large cap stocks. Smaller companies tend to be more closely tied to domestic economic activity, and investors increasingly recognized the benefits of accelerating capital investment, manufacturing reshoring, infrastructure spending, and improving earnings growth. Our equity portfolios benefited from an overweight allocation to small and microcap companies, an area where we continue to find attractive valuations and compelling long-term opportunities.
The economy remained strong, successfully navigating the challenges posed by higher oil prices in 2026. Consumer spending stayed healthy, unemployment remained relatively low, and corporate balance sheets continued to support investment. At the same time, one of the largest capital spending cycles in modern history is unfolding. Major technology companies are expected to spend nearly $1 trillion this year on data centers, semiconductors, power infrastructure, and related investments needed to support artificial intelligence. Importantly, these expenditures benefit far more than technology companies alone. Industrial manufacturers, utilities, engineering firms, construction companies, and a wide range of service providers are participating in this growth cycle. Combined with the ongoing reshoring of manufacturing capacity and supply chains, these trends are creating meaningful tailwinds for the broader U.S. economy.
Inflation remains above the Federal Reserve's long-term target. Continued fiscal spending, manufacturing reshoring, AI-related capital investment, and periodic increases in oil and energy prices should keep some upward pressure on costs, which may result in interest rates remaining higher for longer than many investors expected at the beginning of the year.
Looking ahead, we remain constructive on both the economy and financial markets. We believe the most important drivers of growth remain the continued reshoring of U.S. manufacturing and the massive investment cycle supporting artificial intelligence infrastructure along with some benefits from the One Big Beautiful Bill Act. Combined with improving earnings trends across a broader range of industries, this creates a favorable backdrop for markets into the second half of 2026.