July 27, 2026

Financial Markets

  • After falling in the first quarter, U.S. equity markets sharply reversed course. The S&P 500 (+10.2%), the NASDAQ (+13.1%), and the Dow (+20.8%) indices hit record highs driven by AI investment spending and a strong earnings season. Growth stocks outperformed value in Q2 as many software and Mag 7 stocks partially bounced back.
  • Technology stocks grew +31.8% in Q2, leading all sectors, while Energy stocks experienced a reversal (-13.5%) after having shot up +34.0% in Q1. Emerging markets stocks shot up +24.1% for the quarter. International developed markets, however, underperformed the S&P 500 by 4.4% for the quarter.
  • Bonds had low, but positive returns across all categories. Higher-yielding corporate bonds performed well as investors regained confidence that the Middle East conflict would not spread to become a wider regional conflict.

Overview of the Economy

  • U.S. gross domestic product (GDP) grew at approximately 2.5% annualized in Q2, up from 2.1% annualized in Q1. Productivity was helped by strong business investment, especially AI-related spending, better consumer spending, and continued resilience in the labor market.
  • U.S. unemployment held steady at 4.3% staying within the narrow range of 4.3% – 4.5% that has persisted since mid-2025. Employers continued to add jobs and initial unemployment claims remained relatively low.
  • Oil prices fell in Q2, but U.S. inflation ticked up. Despite lower oil prices, broad energy costs remained at elevated levels. Other causes of higher inflation were escalating health care, transportation, and shelter costs.

Notable Events

  • Geopolitical tensions eased as the U.S. and Iran communicated a mutual willingness to negotiate a peace deal. Under the leadership of its new Chairman Kevin Warsh, the Fed kept its policy rate unchanged as inflation remained above its target. The AI investment boom continued, attracting investors while also raising concerns.