A broad group of companies carried the U.S. stock market to a 10.9%1 return in the first half of 2026.
Over the past three years, seven technology companies—the so-called “Magnificent Seven”—accounted for most of the U.S. market’s gains. That pattern shifted in the first half of this year. Earnings at the largest AI-related companies remained strong, but many of the second quarter’s best-performing stocks were companies supplying the memory and processing chips that power AI datacenters. Smaller companies also contributed meaningfully, gaining 22.6%2 so far this year, well ahead of the 10.3%3 return for their larger counterparts.
The buildout of AI infrastructure drove exceptional returns in emerging markets.
Two South Korean memory-chip makers and Taiwan’s dominant semiconductor manufacturer make up a large share of the emerging markets index, which has returned 23.8%4 so far this year—well above the U.S. market’s 10.9%1 and the 9.4%5 return for other developed markets. This surge has left both U.S. and Asian markets increasingly concentrated in AI-related companies. We believe strongly in diversifying broadly across global markets to manage this concentration risk, recognizing that not every AI company will hold onto today’s valuations and new companies will emerge as the technology matures.
A spike in inflation is starting to ease.
Shipping has resumed through the Strait of Hormuz as we publish this commentary. Whether the current Memorandum of Understanding between the U.S. and Iran leads to a lasting peace remains to be seen. For now, oil prices have returned to pre-conflict levels. U.S. inflation rose to 4.2%6 recently but is expected to ease over the balance of the year as gas prices decline.
Longer-term interest rates barely moved, even as short-term yields rose.
The yield on the 2-year U.S. Treasury Note rose from 3.5% to 4.1% so far this year as markets pushed out expectations for Fed rate cuts, while the 10-year Treasury Note moved only modestly, from 4.2% to 4.4%. With the Iran conflict and AI-related demand pushing prices higher, the Federal Reserve has paused changes to short-term interest rates. The Fed noted that while the recent rise in inflation may prove temporary, low unemployment and steady consumer spending give it no reason to stimulate the economy at this time.
Strong markets test discipline.
When strong markets push your portfolio’s stock allocation above its target, it calls for trimming equity exposure—often realizing capital gains in the process. We would rather take profits deliberately than have a market decline take them away, and paying some tax now is not a bad outcome given that capital gains rates remain close to historic lows. It remains important to revisit whether your goals have changed and to determine the most tax-efficient way to move your portfolio back toward its target risk level.
Notes: 1) Russell 3000 Index; 2) Russell 2000 Index; 3) Russell 1000 Index; 4) MSCI EM Index; 5) MSCI EAFE Index; 6) Headline CPI year over year as of May 2026.