Key Takeaways:
The S&P 500 just delivered its strongest three-month stretch since 2020, and the question now is whether the second half can match it.
The S&P 500 closed out its best quarter in six years Tuesday, capping a three-month rally that pushed the benchmark index to fresh highs as investors weighed whether the momentum can carry into the second half of 2026.
"The magnitude of this rally has surprised even the bulls, and the debate now is whether we're in the early stages of a sustained advance or setting up for a mean-reversion event," said Michael Wilson, chief equity strategist at Morgan Stanley. "The next catalyst will be second-quarter earnings season, which starts in mid-July."
The S&P 500 rose roughly 12% in the April-to-June period, its largest quarterly gain since the second quarter of 2020, when the index surged 20% from pandemic-era lows. The Nasdaq Composite posted an even steeper advance, climbing about 15% over the same stretch, according to data compiled by Bloomberg. The Dow Jones Industrial Average lagged but still notched a double-digit percentage gain.
Technology and communication services led the rally, with the information technology sector gaining more than 18% and communication services adding over 16%. Energy and utilities were the worst performers, each rising less than 5%, as falling crude prices weighed on oil producers and a rotation out of defensive names accelerated. The advance-decline ratio on the New York Stock Exchange averaged roughly 1.6-to-1 over the quarter, indicating broad participation beneath the headline index.
The rally unfolded against a backdrop of easing financial conditions. The 10-year U.S. Treasury yield fell about 30 basis points during the quarter to near 4.10%, while the Bloomberg Dollar Spot Index declined roughly 2%, providing tailwinds for risk assets. West Texas Intermediate crude slid about 8% to near $72 a barrel, helping contain inflation expectations even as equity valuations expanded.
The VIX, Wall Street's so-called fear gauge, averaged near 15 during the quarter, well below its long-term median of about 18, reflecting subdued hedging demand as the rally gathered steam. Trading volume on U.S. exchanges ran about 8% above the 20-day average in the final week of June, as portfolio managers rebalanced ahead of quarter-end.
Looking ahead, the focus shifts to second-quarter earnings season, which kicks off in mid-July with reports from major banks. Analysts expect S&P 500 earnings per share to grow roughly 10% year over year, according to consensus estimates compiled by Bloomberg. A Seeking Alpha contributor maintained a year-end 2026 S&P 500 price target of 7,795, implying further upside from current levels.
The risk, some strategists argue, is that valuations have run ahead of fundamentals. The S&P 500 trades at about 22 times forward earnings, above its five-year average of 19.5, leaving little room for disappointment. If earnings fail to deliver, the same rotation that powered the rally could reverse just as quickly.
This article is for informational purposes only and does not constitute investment advice.
