Over the past three years, the “Magnificent 7” stocks (Apple, Microsoft, Amazon, Alphabet, Meta Platforms, Nvidia, and Tesla) have dominated stock market returns. However, these seven companies on average generated a negative return in the first half of the year. We’re finally seeing a rotation within the stock market that points to broader participation and likely a healthier move higher.
While the largest tech companies have lagged in performance, technology stocks overall continue to lead sector returns, with large-cap tech stocks up 32.7% year-to-date. Companies such as Advanced Micro Devices, Micron Technology, and Intel Corp, among others, benefited the most from positive investor sentiment in AI investment and contributed to much of the strong returns for the sector, each returning over 100% in the second quarter alone. Within our portfolios, the large-cap momentum fund was able to best take advantage of these gains, with the fund returning 43% for the quarter.
Given the increase in market breadth, the concentration in broad large-cap stock market indices have declined from their record highs. However, the top 10 stocks in the S&P 500 still represent 38% of the index, so concentration is still much higher than in the past. Valuations for the index also remain near their long-term highs, with the Shiller CAPE Ratio ending the quarter at 41x, almost as high as the peak of the dot-com boom.
Emerging Markets Lead Returns
Similar to domestic stocks, positive sentiment in AI helped tech companies overseas develop exceptional returns. Taiwan Semiconductor and Samsung Electronics were two standouts as the semiconductor sector globally rose sharply in the second quarter. However, despite their recent gains, emerging market indices still trade at valuations much cheaper than large-cap domestic stocks.
Inflation Back on the Rise
The war in Iran drove oil prices and overall inflation higher throughout the quarter. Crude oil prices rose above $110/barrel at times during the first two months of the quarter. This helped contribute to an increase in headline inflation of 4.2% in May, the highest inflation reading in over three years. Tensions began to ease towards the end of the quarter and oil prices dropped back down to under $70/barrel. Despite energy prices returning to where they were when the conflict escalated earlier in the year, the recent bout of volatility will likely continue to impact inflation readings in the months to come.
The increase in inflation coincided with the appointment of new Fed Chairman Kevin Warsh, who replaced Jerome Powell in May. The increase in inflation over the past couple months led to a stark change in the FOMC’s interest rate projections. In March, a majority of members anticipated at least one rate cut by the end of the year, but by June, almost all committee members expected rates to either stay the same or rise before year end. These factors drove bond yields higher across the yield curve, which negatively impacted bond prices for the quarter.
Stock Valuations and Looking Ahead
Easing geopolitical tensions and strong investor sentiment in AI helped drive the exceptional stock returns this quarter in both domestic and international markets. For U.S. large-cap stocks specifically, these high returns have pushed the already elevated valuation levels even higher. Valuation for the S&P 500 is historically high and above levels where past market crashes have occurred. Is this an indication that a market downturn is imminent? Certainly not. At the end of 2021, the CAPE ratio was above 38x, and since then, stocks have returned 12.2% annually, well above the long-term average. But with large-cap stocks priced at nearly their highest level relative to earnings in history, longer-term returns will be more difficult to come by. That is why we believe having exposure to more attractive areas of the market (small-cap stocks, value stocks, and international stocks for example), while always important, is especially crucial given the current environment.
Disclaimer: Armbruster Capital Management’s views as portrayed in this post are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector. Investing involves risks, and the value of your investment will fluctuate over time, and you may gain or lose money. Past performance is no guarantee of future results.
Portfolio Review Q2 2026
Stocks rebounded strongly from a slow first quarter by posting double-digit returns across the board in the second quarter. The S&P 500 returned 15.2% for the quarter, while small-cap stocks led domestic returns, earning 19.7%. Emerging market stocks were the big winners, gaining over 24%. Bond returns were muted for the quarter as an uptick in inflation drove yields higher.
U.S. Market Showing Signs of Broadening Out
Over the past three years, the “Magnificent 7” stocks (Apple, Microsoft, Amazon, Alphabet, Meta Platforms, Nvidia, and Tesla) have dominated stock market returns. However, these seven companies on average generated a negative return in the first half of the year. We’re finally seeing a rotation within the stock market that points to broader participation and likely a healthier move higher.
While the largest tech companies have lagged in performance, technology stocks overall continue to lead sector returns, with large-cap tech stocks up 32.7% year-to-date. Companies such as Advanced Micro Devices, Micron Technology, and Intel Corp, among others, benefited the most from positive investor sentiment in AI investment and contributed to much of the strong returns for the sector, each returning over 100% in the second quarter alone. Within our portfolios, the large-cap momentum fund was able to best take advantage of these gains, with the fund returning 43% for the quarter.
Given the increase in market breadth, the concentration in broad large-cap stock market indices have declined from their record highs. However, the top 10 stocks in the S&P 500 still represent 38% of the index, so concentration is still much higher than in the past. Valuations for the index also remain near their long-term highs, with the Shiller CAPE Ratio ending the quarter at 41x, almost as high as the peak of the dot-com boom.
Emerging Markets Lead Returns
Similar to domestic stocks, positive sentiment in AI helped tech companies overseas develop exceptional returns. Taiwan Semiconductor and Samsung Electronics were two standouts as the semiconductor sector globally rose sharply in the second quarter. However, despite their recent gains, emerging market indices still trade at valuations much cheaper than large-cap domestic stocks.
Inflation Back on the Rise
The war in Iran drove oil prices and overall inflation higher throughout the quarter. Crude oil prices rose above $110/barrel at times during the first two months of the quarter. This helped contribute to an increase in headline inflation of 4.2% in May, the highest inflation reading in over three years. Tensions began to ease towards the end of the quarter and oil prices dropped back down to under $70/barrel. Despite energy prices returning to where they were when the conflict escalated earlier in the year, the recent bout of volatility will likely continue to impact inflation readings in the months to come.
The increase in inflation coincided with the appointment of new Fed Chairman Kevin Warsh, who replaced Jerome Powell in May. The increase in inflation over the past couple months led to a stark change in the FOMC’s interest rate projections. In March, a majority of members anticipated at least one rate cut by the end of the year, but by June, almost all committee members expected rates to either stay the same or rise before year end. These factors drove bond yields higher across the yield curve, which negatively impacted bond prices for the quarter.
Stock Valuations and Looking Ahead
Easing geopolitical tensions and strong investor sentiment in AI helped drive the exceptional stock returns this quarter in both domestic and international markets. For U.S. large-cap stocks specifically, these high returns have pushed the already elevated valuation levels even higher. Valuation for the S&P 500 is historically high and above levels where past market crashes have occurred. Is this an indication that a market downturn is imminent? Certainly not. At the end of 2021, the CAPE ratio was above 38x, and since then, stocks have returned 12.2% annually, well above the long-term average. But with large-cap stocks priced at nearly their highest level relative to earnings in history, longer-term returns will be more difficult to come by. That is why we believe having exposure to more attractive areas of the market (small-cap stocks, value stocks, and international stocks for example), while always important, is especially crucial given the current environment.
Disclaimer: Armbruster Capital Management’s views as portrayed in this post are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector. Investing involves risks, and the value of your investment will fluctuate over time, and you may gain or lose money. Past performance is no guarantee of future results.
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