Welcome to another edition of our RiverFront Group semi-annual market review.
To quickly summarize what is below, the first half of 2026 saw strong returns for U.S. equities, but the path was far less linear than the final numbers suggest. The S&P 500 gained 9.5% in the first six months of the year, while the Nasdaq Composite advanced roughly 12.8%, supported by another wave of enthusiasm around artificial intelligence, resilient corporate earnings, and a sharp second-quarter rebound after an early-year drawdown.
Bonds told a more nuanced story. Treasury yields remained elevated as inflation reaccelerated during the spring, the Federal Reserve held interest rates steady, and investors reassessed whether rate cuts were still plausible in 2026. By the end of June, the 10-year Treasury yield was around 4.44%, reflecting a market still wrestling with the prospect of higher-for-longer interest rates.
Equity Market Performance
U.S. stocks finished the first half with impressive gains, but those returns obscure meaningful volatility beneath the surface. At one point in March, the S&P 500 was down 7.3% year-to-date before recovering sharply. By the end of June, the index had delivered its best quarterly performance since the pandemic-era rebound of 2020. This chart illustrates this sharp drop followed by the steady climb upwards.
This recovery was driven by a combination of earnings growth, renewed confidence in the economic backdrop, and a market willing to look through the geopolitical shocks of the closure of the Strait of Hormuz followed by a steep climb in oil prices. Importantly, market leadership began to broaden somewhat in June, with financials and healthcare stocks participating more meaningfully after semiconductors and AI-linked technology had carried most of the gains earlier in the year.
Bond Market Performance
Bond markets spent much of the last six months trying to price in the expected changes in Federal Reserve policy. The Federal Reserve left its benchmark interest rate unchanged at 3.50% to 3.75% during its June meeting, but inflation remained above their 2% target and several policymakers signaled concern that price pressures were not easing quickly enough. Rather than signaling for a rate cut later on this year as investors expected back in January, the focus shifted to a potential rate increase later on this Fall.
That backdrop kept upward pressure on yields, which also means downward pressure on bond prices, particularly after inflation accelerated in the spring, as illustrated on this chart. The benchmark 10-year Treasury yield climbed to 4.55% in early June, up from 4.18% at the start of the year. Similarly, the rate-sensitive 2-year Treasury yield hit 4.24% after starting the year under 3.5%, underscoring the market’s concern that Fed policy may call for rate hikes over the next 24 months.
For our diversified portfolios, this meant bonds continued to offer income and a more compelling starting yield than in prior years, but they did not always act as the traditional shock absorber during the bouts of stock market volatility. We’ve continued to maintain a medium-term duration in our bond portfolio to capitalize on the better yields available but avoid the longer dated maturity bonds that carry the bulk of the interest rate risk.
The War in Iran and Market Implications
Geopolitics was a main driver of volatility in the first half of the year, and the war in Iran was especially important because of its implications for energy markets, inflation expectations, and risk sentiment. This conflict, which started in late February, disrupted shipping traffic through the Strait of Hormuz, at one point choking off roughly one-fifth of global oil and liquefied natural gas flows, driving oil prices sharply higher.
The resulting oil spike fed directly into inflation concerns and complicated the policy outlook for the Federal Reserve. Brent crude, which had traded around $70 per barrel in the first two months of the year, rose materially throughout the conflict, briefly touching the high $130s in late April before easing again as ceasefire efforts and shipping normalization reduced immediate supply fears.
By late June, oil had largely returned to pre-war levels as supply concerns eased and tankers resumed moving through the Strait of Hormuz more freely. More recently, as the conflict has flared back up and Iran has resumed attacks on ships transiting the Strait, oil prices have again risen to over $80 per barrel. This rapid fluctuation in risk helps emphasize the importance of broad diversification within your portfolios and investing at a risk level that matches your goals and timelines.
AI Investing and the “Picks and Shovels” Trade
Artificial intelligence remained one of the defining investment themes for the first half of 2026. Gains in this sector haven’t come solely from the application side of the AI market, companies such as Microsoft, Google, Apple, and many others, but instead have been coming from what we refer to as the pick and shovel companies.
In practice, that has meant the market has continued to reward the companies selling the computational backbone of the AI buildout we’ve heard so much about: semiconductors, networking hardware, memory, data-center equipment, and other infrastructure necessary to train and deploy large-scale AI systems.
This performance leadership from the infrastructure side of AI makes intuitive sense. The spending on hardware and infrastructure is necessary for the application-based companies to strive for their own success. Just like the gold miners of the late 1800’s needed picks and shovels to try and strike it rich, the AI buildout is no different. The Federal Reserve itself noted in July that the booming buildout of AI technology was contributing to broader price pressures, an observation that underscores how large the capital spending wave has become and why the market has continued to favor infrastructure-oriented beneficiaries.
Closing Thoughts
The first half of 2026 was stronger than many expected at the broad index level, but it was a volatile and complex road to positive returns. Stocks rose decisively, bonds faced a still-challenging inflation and rate backdrop, geopolitical risk reasserted itself through the energy markets, and AI investing remained a powerful but increasingly selective driver of market returns.
The remainder of 2026 has a lot in store, including midterm elections. Midterm elections can have an impact on stock market performance but it’s impossible to predict which direction the market will move, much less what the outcome of all the elections will be. Importantly, the stock market usually sees some volatility around elections and so if we see that occur in November, it will be expected and completely normal.
The takeaway from the last six months is not merely that equity assets performed well. It is that market leadership, inflation persistence, and geopolitical risks all mattered in ways that should encourage careful diversification, disciplined risk management, and close attention to matching those up with your goals and time horizons.
As always, we are here to help and look forward to connecting with you as the year runs on. Please do not hesitate to reach out to us if you have any questions or concerns. We thank you for your continued trust in us and we wish you a great rest of 2026.
Sincerely,
Karl Knuths
Investment Specialist