A Powerful Recovery Meets a Patient Test

Q3 2026 Market Commentary: A Powerful Recovery Meets a Patient Test

The second quarter of 2026 delivered one of the most dramatic turnarounds in recent memory. After a turbulent first quarter defined by the U.S.-Iran conflict and a spike in energy prices, markets came roaring back. The S&P 500 gained roughly 14.9% in Q2, its best quarter since 2020, erasing the first quarter's 4.6% decline and pushing the index to more than 24 new record highs on the year. The rally was also notably broad: while technology led, gains extended across financials, healthcare, utilities, and communications. As we enter the second half of 2026, the market's resilience is a powerful reminder of why staying invested through uncertainty matters, but it also sets up a classic test of investor patience.

Three key themes shaping Q3 2026

1. A new Fed chair and a higher-for-longer reality

Kevin Warsh took over as Federal Reserve Chair this spring, and he inherited a stubborn problem: inflation that simply will not fully cooperate. Core inflation has been running near 2.9%, above the Fed's 2% target, and the June meeting minutes released in early July confirmed the Fed is holding its policy rate at 3.5-3.75% with no cuts expected until 2027. In fact, with renewed geopolitical tensions, markets now assign meaningful odds to a rate hike later this year. This is a shift from the rate-cut environment many expected coming into 2026.

The good news is that the economy is strong enough to handle it, growth has reaccelerated, unemployment remains low, and corporate profits are healthy. For investors, the takeaway is simple: do not count on falling interest rates to power returns. The heavy lifting will need to come from earnings, and on that front, the news is encouraging.

2. Earnings strength is broadening beyond a handful of names

For years, a small group of mega-cap technology companies drove the lion's share of market returns. That concentration made many investors nervous. In 2026, the story is finally changing. S&P 500 earnings are on track for their strongest annual growth in years, and the gains are spreading well beyond technology. Artificial intelligence is paying off well beyond the companies that build it. A much broader group of businesses, from healthcare and financials to industrials and utilities, is harnessing it to work more efficiently and boost their bottom lines.

This broadening is healthy. It means the market is standing on more legs, and it rewards the diversified investor who owns more than just the most obvious names. When earnings are strong and participation is broadening, the foundation for continued long-term gains is more durable than headlines suggest.

3. Midterm-year volatility: history says buckle up, then stay the course

2026 remains a midterm election year, and while the second quarter's recovery was exhilarating, history offers an important word of caution. Midterm years are famous for their volatility, with an average intra-year peak-to-trough decline near 17.5%, deeper than the typical year. Market volatility has also historically peaked in September, before easing once the votes are counted. In other words, a bumpy late summer and fall would be entirely normal, not a reason to panic.

Here is the encouraging part, and it is remarkable: in all 19 midterm cycles since the 1940s, the S&P 500 has been positive in the 12 months following the midterm-year low, with an average gain of roughly 31.7%. The message from history could not be clearer: if we see the pullback that midterm years are known for, it will be critically important to stay invested and not let short-term noise derail a long-term plan.

The bottom line

The first half of 2026 has been a masterclass in why market timing is so difficult and so dangerous. An investor who fled the market amid the first quarter's conflict and energy shock would have missed one of the best quarters in years. The rebound came suddenly, without an all-clear signal, exactly as recoveries usually do.

As we look to the second half, there are plenty of reasons for headlines to feel unsettling, a hawkish Fed, elevated valuations, and the volatility that midterm years reliably deliver. But the fundamentals that build long-term wealth remain firmly intact.

Corporate earnings are strong and broadening. The economy continues to grow. Household balance sheets are healthy. Investors who stayed disciplined through the first quarter's fear were rewarded within months. Those who stay diversified, stay patient, and keep their focus on the long term are the ones who consistently benefit most from the opportunities ahead. It has always been a good time to invest for the long term, and that remains as true today as ever. Please note past performance is not a guarantee of future results.