Most markets delivered a strong second quarter, with both equities and fixed income posting positive gains. The period was characterized by a fairly stark shift in leadership: technology, which had shown signs of weakness in the first quarter, roared back in the second quarter, reclaiming its position as the top-performing US sector. The S&P 500 returned 15.2% for the quarter — its best quarterly showing since the pandemic recovery of Q2 2020, and one of only a dozen quarters this strong since 1950. That single quarter not only erased the first quarter's losses but pushed the Index to a 10.2% gain for the year through June.
Asset class returns — 2Q 2026 & year-to-date. Source: YCharts.
An encouraging, if still-developing, occurrence beneath headline performance numbers is evidence of improving breadth or broadening market participation. Rather than returns being driven by a handful of mega-cap names or a single investment theme, gains this quarter were more widely shared. Small-cap U.S. equities and non-U.S. emerging market stocks, both of which have lagged the largest technology names for much of the past several years, led the way in Q2, each posting returns north of 20%. The “Magnificent 7” stocks may no longer be the only game in town, and if this trend holds, it's a welcome sign that diversification is finally being rewarded rather than merely tolerated.
The following chart shows the “Magnificent 7” stocks versus the remaining other 493 stocks in the S&P 500 Index:
“Magnificent 7” stocks versus the remaining 493 stocks in the S&P 500 Index.
Note that the 493 stocks, or ex-Mag7 stocks (black line), have reached a new high recently, whereas the Mag 7 stocks appear to be struggling in comparison.
Broader market participation tends to reflect healthier underlying fundamentals than narrow, concentrated leadership as it suggests improving confidence across a wider swath of companies and industries, not just conviction in a select few. That said, one quarter of breadth doesn't make a trend, and we'll be watching closely to see whether this participation is able to sustain through the second half of the year.
Commodities were the standout laggard in the second quarter, as the price of oil (WTI) plunged more than -30% and gold continued its retreat, falling roughly -14% over the period. Few areas of the market illustrate the whiplash in returns between the first and second quarters as clearly as commodities did. Crude oil, which spiked earlier in the year as the U.S.-Iran conflict threatened to disrupt shipping through the Strait of Hormuz, gave back the bulk of those gains as tensions between the two countries eased and prices drifted back toward pre-conflict levels.
Gold traced a similar path as oil, surging in the first quarter only to suffer a sharp bout of profit-taking in the second quarter, falling roughly -14% and turning negative for the year. The pullback reflects a shifting set of crosscurrents: elevated interest rates continue to raise the opportunity cost of holding a non-yielding asset like gold, while easing geopolitical tensions reduced the urgency of safe-haven positioning. At the same time, persistent inflation concerns and continued central bank buying have kept a floor under prices, tempering the decline. The net effect has been that most precious metals have been caught between competing forces.
The second quarter also brought a once-in-a-generation change at the Federal Reserve. In May, the U.S. Senate confirmed Kevin Warsh as the Fed's new chair, in the most contentious confirmation vote in the central bank's history, reflecting just how politically charged monetary policy has become in this environment. Any hope President Trump may have held that a Warsh-led Fed would move quickly to cut rates was dashed as the central bank maintained its benchmark rate at 3.5% to 3.75% at its June meeting.
Warsh inherits an admittedly complicated backdrop. Headline inflation rose to 4.2% in May, its highest reading since 2023, even as the labor market has remained fairly resilient. That combination — sticky if not rising inflation alongside continued employment buoyancy — has prompted investors to recalibrate expectations, shifting away from further rate cuts and toward the possibility of hikes later this year.
As a reminder, interest rates are typically cut when the economy is struggling or at risk of recession, and raised or held steady when growth and inflation are running hot. Viewed through that lens, the fact that rates remain elevated is, in a sense, a good problem to have as it reflects an economy that continues to generate jobs and demand, rather than one requiring life support.
For markets, the early verdict on Warsh has been one of cautious adjustment rather than alarm. Equities largely absorbed the June rate decision in stride, but the path of Fed policy under new leadership is likely to remain one of the more closely watched storylines for the second half of 2026, as investors look for clues or any indications on how this Fed's reaction may differ from the previous Powell-led version.
Turning to valuation, the exhibit below compiles several well-known valuation metrics, and the message across nearly all of them is quite consistent: markets are extremely overvalued by historical standards, with many measures either rivaling levels last seen during the 2000 dot-com bubble or setting new all-time highs outright.
A range of well-known valuation metrics for US equities.
Whether one looks at price-to-earnings, price-to-sales, market cap-to-GDP, or other traditional yardsticks, the conclusion is largely the same: valuations are stretched, and the cushion for error has grown very thin.
The next chart looks at margin debt relative to the M2 money supply, a useful gauge of how much leverage investors are employing. As the chart shows, this ratio currently sits at levels last reached in 2007 and 2000, both periods that preceded significant market peaks and subsequent drawdowns.
Margin debt relative to the M2 money supply.
Taken together, it would appear stocks are priced for perfection with investors “all in” with margin leverage – a potentially lethal combination as it leaves very little room for disappointment. Should an unexpected shock occur, whether economic, geopolitical, or company-specific, the resulting price declines could trigger margin calls, forcing investors to sell into weakness. That forced selling can drive prices lower still, triggering further margin calls in a self-reinforcing cycle. It's an ugly dynamic that has fueled some of history's sharpest selloffs, and one that sets the stage for potential panic if conditions turn.
It's worth noting that elevated valuations and high margin debt are not, by themselves, reliable timing signals. Markets have historically been able to remain expensive, and leverage elevated, for extended periods before any reversal occurs. Rather than calling for an imminent market decline, we view this as a reason to remain disciplined and maintain appropriate diversification, ensuring portfolios aren't overly concentrated in the most richly valued corners of the market. Valuation is a poor short-term timing tool but a much more reliable guide to long-term expected returns, and the current backdrop argues for tempered return expectations and careful risk management going forward.
Finally, in reviewing the second quarter, we'd be remiss not to acknowledge the debut of SpaceX as a publicly traded company, becoming the largest IPO in market history. The demand was nothing short of extraordinary, with SpaceX's market capitalization peaking at just under $3 trillion in June, as investors clamored for a piece of Elon Musk's company. Few IPOs in memory have generated this level of excitement and fewer still have commanded a valuation of this magnitude right out of the gate.
Keeping valuation debates aside, the historical track record of major IPOs offers a sobering, cautionary note for investors tempted to chase this kind of debut. The table below tracks major IPO deals over the past 15 years, and the data is not pretty as the median first-year return comes in at -31%, with a median maximum drawdown from the IPO price of a painful -53%. Put simply, even the most hyped, highly anticipated public debuts have historically delivered disappointing, and often sharply negative, returns to investors who bought early.
Major IPO deals over the past 15 years: 1-year returns and maximum drawdowns.
As always, we appreciate the trust you place in our team at MW. If your financial goals, retirement plans, or personal circumstances have changed, we encourage you to reach out so we can ensure your investment strategy remains aligned with your objectives.
Thank you for your continued confidence.
Market data in this newsletter is as of June 30, 2026.
Any references to specific securities, products, or services do not constitute a recommendation or endorsement. Mention of any particular security in this publication, including reference to the performance of a particular security, is for illustrative purposes only. Clients of Measured Wealth may hold positions in the security, and Measured Wealth may buy or sell the security at any time. Past performance of any security, index, strategy, or market is not indicative of future results. Any index performance referenced herein is provided for informational context only; indices are unmanaged, do not incur fees, and are not available for direct investment. Statistical data attributed to third parties is believed to be from reliable sources but has not been independently verified.
All forward-looking statements and projections are subject to uncertainty and should not be relied upon as predictions of future results. All investments involve risk, including the possible loss of principal.
’Magnificent 7’ is a market term and is being used for illustrative purposes only. The individual securities and related returns shown are presented solely for illustrative and informational purposes to demonstrate recent market trends. They are not intended to represent holdings in any Measured Wealth portfolio, nor do they represent investment recommendations or past or current performance of any Measured Wealth strategy. Measured Wealth may or may not hold any of the securities discussed.”
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