Q2 2026 Market Commentary
In December 1996, Federal Reserve Chair Alan Greenspan posed a question that has echoed through market history ever since: “How do we know when irrational exuberance has unduly escalated asset values?” Greenspan, who passed away a few weeks ago, asked the question at a moment when he believed markets might be getting ahead of themselves. He was right to wonder, but the market did not share his concern. Stocks continued climbing for several more years before the dot-com era eventually ran its course.
As the buildout of AI infrastructure has pushed global stock markets higher over the past few quarters, we find ourselves revisiting Greenspan’s question. Markets delivered strong gains in Q2, building on a year of resilient growth despite geopolitical conflict that disrupted global energy markets. The drivers of growth remain concentrated in artificial intelligence and the wide-ranging infrastructure being built to support it. Even with strong corporate earnings, a growing chorus of observers is asking whether enthusiasm has begun to outrun fundamentals. Greenspan’s question is useful not because it gives us a clear answer today, but because it reminds us how difficult it is to know that answer in real time.
Q2 In Review
Markets posted strong results in Q2, helped by easing geopolitical tensions and continued earnings growth across the technology sector.
- Large Cap U.S. stocks gained +15.2%: Continued strength in AI-related earnings, particularly among semiconductor and memory companies, drove a large share of the index’s return.
- Small Cap U.S. stocks gained +19.7%: Smaller companies extended a strong year, benefiting from more attractive valuations and improving earnings growth.
- International stocks gained +11.1%, while emerging markets gained +24.2%: Both indexes were propelled by AI and commodity related companies and continued to provide meaningful diversification benefits for diversified portfolios this year.
- U.S. Bonds returned +0.7%: Fixed income markets stabilized as energy-driven inflation pressure began to ease later in the quarter.
- Real Estate gained +9.3%: Specialty sectors, including data center exposure, supported returns while real estate continued to provide income within diversified portfolios.[1]
This quarter’s dominant geopolitical headline was the war in Iran, which disrupted energy markets and revived inflation concerns for much of the period. A tentative resolution, along with retreating oil prices, has eased some of that pressure heading into the third quarter. Even so, the significance of the Strait of Hormuz to global energy flows means this risk has not fully faded from investors’ minds, and we will continue to watch this closely as we move into the remainder of the year.
Exuberance Examined
The case for caution centers on concentration. The S&P 500 now holds more than 35% of its weight in its ten largest companies, with that figure exceeding 50% once the top 25 are included.[2] This is not unique to the U.S. We see international and emerging market indexes exhibiting similar dynamics, with AI-related stocks increasingly dominating global benchmarks. This concentration adds a layer of risk that is not always obvious to investors who may assume that an index is automatically well diversified.
We do not believe global markets are uniformly detached from fundamentals. Some sentiment measures and specific sectors are stretched, but others remain closer to long-term norms. Strong fundamentals and structural themes, such as the ongoing AI buildout, can justify higher valuations for a period of time. That said, when investor expectations are elevated, markets can be more vulnerable to disappointment if momentum begins to fade. Even a strong AI-fueled tailwind does not eliminate the normal ups and downs of investing.
A Two-Speed Economy
Beneath the market’s overall strength lies a more complicated economic picture, often described as a “K-shaped.” One leg of the economy continues to grow rapidly, anchored in AI infrastructure spending and the regions building it. The other leg tells a more strained story, with continued inflation putting pressure on household budgets and consumer sentiment near historic lows. Even within the technology sector itself, the picture is mixed, with some software companies navigating stock price declines and layoffs amid concerns that AI may disrupt their business models.
This divergence has placed the Federal Reserve in a difficult position. Inflation and sticky energy prices argue for caution, and potentially even a higher-for-longer path for interest rates. At the same time, softer employment data argues for eventual cuts to support a slowing labor market. We do not believe it is productive to predict which path the Fed will take. What matters more to clients is recognizing that this uncertainty is real, that reasonable people disagree about the right path forward, and that a well-built financial plan should not depend on guessing correctly.
Looking Ahead
The lesson from Greenspan’s question remains relevant thirty years later, not because it gives investors a precise warning signal, but because it encourages the right kind of humility. Markets can appear expensive and still keep rising. Powerful innovations can create lasting value and still become overextended along the way.
We do not believe that anyone can consistently predict when the market will crest into irrational territory. That is why our approach does not depend on calling the peak of an AI cycle, predicting the Fed’s next move, or moving portfolios in response to every shift in sentiment. Instead, we focus on the parts of investing that remain within our control: broad diversification, disciplined rebalancing, thoughtful risk management, and financial plans built with enough flexibility to adapt.
The current environment is a reminder that optimism and caution can coexist. We can recognize the real momentum behind today’s market leaders while still preparing portfolios for a wider range of outcomes. That balance is what helps clients stay invested with confidence, even when the echoes of exuberance grow louder.
Resources
[1] Performance reflects the following indexes: Large Cap US (S&P 500 TR), Small Cap US (S&P 600 TR), International Developed (MSCI EAFE Index TR), Emerging Markets (MSCI EM Index TR), U.S. Bonds (Bloomberg Aggregate Bond Index), Real Estate (CRSP US REIT Index TR). Source: YCharts, Inc.
[2] S&P 500 Companies by Market Cap. Slickcharts
