There is a saying that smooth seas do not make skillful sailors. When it comes to investing, this has rarely been more applicable than during the first half of 2026. Investors confronted a series of significant events, including the war in Iran, energy prices pushing inflation to multi-year highs, and ongoing questions surrounding artificial intelligence (AI). Despite these headwinds, markets climbed to new all-time highs, corporate earnings expanded at a double-digit pace, and a broad range of asset classes delivered strong results. The first six months served as a powerful reminder of the value of staying invested and keeping a longer time horizon in mind.
This lesson carries even greater weight today, given that the business cycle has now entered its seventh year while the market cycle is approaching its fifth. For many investors, it can feel as though the same set of concerns, including inflation, the Fed, and valuations, continue to cycle in and out of focus. Navigating these competing challenges is not just an unavoidable part of investing; it is precisely why investors who stay the course tend to be rewarded over the long run.
There will certainly be unexpected developments in the second half of the year, ranging from the continuing Middle East conflict to the upcoming midterm election and new market activity such as initial public offerings (IPOs). Understanding how to maintain perspective as these events unfold is essential for every investor.
Key market and economic highlights from the first half of 20261
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The S&P 500, Nasdaq, and Dow Jones Industrial Average have returned 9.6%, 12.8%, and 8.9% year-to-date through the end of June, respectively. The second quarter was historically strong, with the S&P 500 returning 14.9%, the Nasdaq 21.4%, and the Dow 12.9%.
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The Bloomberg U.S. Aggregate Bond Index has risen 0.6% year-to-date. The 10-year Treasury yield ended the second quarter at 4.47%, rising from 4.17% at the start of the year.
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Developed market international stocks (MSCI EAFE) have gained 7.7% and emerging market stocks (MSCI EM) have returned 22.7% year-to-date, both in U.S. dollar terms.
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Brent crude peaked just under $120 per barrel in May before closing the quarter at $73 per barrel.
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Headline CPI rose 4.2% year-over-year in May, driven largely by energy prices. Core CPI, which excludes food and energy, rose 2.9%.
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The Federal Reserve kept rates unchanged at 3.50% to 3.75% through the first half of the year. Kevin Warsh was sworn in as Fed Chair in May.
The business cycle is now in its seventh year of expansion
Some investors may be surprised to learn that the current business cycle began in April 2020 during the pandemic and recently passed its sixth anniversary in the second quarter. At multiple points along the way, investors and economists raised concerns about a potential recession, including when inflation peaked in 2022 and when tariffs disrupted global trade last year. Through each of these challenges, the economy has demonstrated resilience, continuing to grow at a steady pace.
The business cycle touches virtually every aspect of investing and financial planning, from mortgage costs to wage growth. A healthy economy supports consumer spending and business investment, which in turn fuels corporate earnings and ultimately drives stock market returns. While the stock market and the broader economy are not identical, they are closely connected. The chart above places this cycle in historical context alongside other expansions. Notably, the longest business cycles on record, including the one that followed the 2008 financial crisis and the 1990s expansion during the dot-com boom, have lasted a decade or more.
How does the economy look today? Inflation remains elevated but could ease if oil prices stay at lower levels. The job market has picked up again, reversing last year's concerns about sluggish hiring. The dollar has stabilized and recently rebounded, trade conditions remain uncertain but have steadied, and business investment has accelerated. Consumers are feeling pessimistic, yet continue to spend on both necessities and discretionary items. On balance, the economy appears healthy despite some mixed signals, which historically has been a constructive backdrop for financial markets over the long run.
Broad asset class participation has supported diversified portfolios
A wide range of global asset classes have contributed positively to portfolios so far this year, building on last year's trend. This includes not only large cap stocks as represented by the S&P 500, but also small caps and emerging markets, as shown in the chart above. The second quarter, in particular, ranked among the strongest on record.
Several themes have driven these returns, including the strength of the broader economy, optimism around a potential peace deal in Iran, and enthusiasm surrounding AI. Many of these factors have supported corporate earnings growth, with profits rising over 20% in the past twelve months for S&P 500 companies.2 This strong market environment has also sparked a wave of high-profile IPOs, including SpaceX in the second quarter and the anticipated listings of OpenAI and Anthropic, both AI companies.
While investors often focus on the first few days of an IPO when media attention is at its peak, the real benefits tend to accumulate over a longer period. These listings broaden the investment opportunity set for all investors, which is particularly meaningful given that many companies have been staying private for longer. What matters most is how these businesses perform over the years and decades that follow their public debut. The largest technology companies today, for instance, have grown through many market and economic cycles over extended time periods.
All of these positive trends do mean that U.S. stock valuations are historically elevated. The S&P 500 currently trades at a price-to-earnings ratio of 20x, above the long-term historical average of 16x.3 These valuation ratios do not predict near-term market direction, but they serve as useful guides when constructing long-term portfolios, particularly when weighing other asset classes and managing risk. Taken together, this year's broad asset class returns underscore the importance of maintaining a balanced approach.
Inflation remains elevated, though oil price declines offer some relief
The shifting fortunes of the conflict in Iran have influenced the U.S. economy most directly through energy markets. Disruptions to oil transportation through the Strait of Hormuz pushed Brent crude to nearly $120 per barrel before prices pulled back sharply. In recent weeks, oil prices have fallen to around $70, approaching pre-conflict levels. Gasoline prices have followed a similar trajectory on a delayed basis, peaking above $4.50 per gallon nationally before retreating below $4.00 per gallon more recently.4
These energy price swings have had a direct impact on inflation. The Consumer Price Index rose 4.2% year-over-year in May, its highest reading in several years, with the gasoline component jumping 40.5% over the same period. Importantly, core CPI, which excludes food and energy, rose only 2.9%.5 This distinction shows that inflationary pressure has been concentrated in fuel prices and has not yet spread broadly across the economy.
With oil prices declining in recent weeks, many economists are hopeful that inflation may be near its peak. This pattern is consistent with other historical geopolitical shocks that disrupted the supply of oil, including Russia's invasion of Ukraine in 2022, and others illustrated in the chart above. Once conditions stabilized in those prior episodes, oil prices tended to recover, and inflation rates gradually moderated over time.
Market volatility has remained within manageable bounds
Investors have become accustomed to brief episodes of volatility triggered by macroeconomic events. Between tariffs, the Middle East conflict, and uncertainty around Federal Reserve policy, these events have produced short-lived market swings over the past year. This pattern is visible in the VIX index, a widely used measure of stock market volatility. Encouragingly, the current VIX reading of 16 sits below its long-term average of 18.4 and well below recent peaks. As the chart above illustrates, periods of elevated volatility can also represent some of the most compelling market opportunities.
Another useful lens for understanding how market moves affect investors is to examine the largest pullback within each calendar year. So far in 2026, the S&P 500's largest peak-to-trough decline has been 9%. While declines of this magnitude are never comfortable, markets have historically rebounded at times when investors least expect it. Today, not only has the market fully recovered from its earlier pullback, but the S&P 500 has reached 24 new all-time highs so far this year.6
The first half of the year reinforces that the most important risk investors face during turbulent periods is not the volatility itself, but how they respond to it. The temptation to time the market during uncertain stretches is understandable, but this approach can frequently backfire. A better path is to hold a portfolio designed to weather all phases of the market cycle while serving long-term financial goals. Taking this approach allows investors to be better prepared for the periods of uncertainty that will inevitably arise in the second half of the year.
Remaining invested continues to be the most effective long-term strategy
One consequence of investors moving to the sidelines during volatile periods is often described as "cash on the sidelines." The primary challenge with this approach is determining the right moment to re-enter the market. The chart above illustrates just how much capital is currently sitting in cash. Money market fund assets have reached a record $7.9 trillion, more than double their pre-pandemic level when interest rates were near zero. This reflects both the market uncertainty of recent years and a period of higher short-term rates that made cash holdings more appealing.
While cash may appear safe and stable on the surface, the challenge is that cash yields often fail to keep pace with inflation. For example, current average rates on certificates of deposit mean that the real income from cash is negative after adjusting for inflation.7 Even when nominal yields on money market funds and short-term instruments seem attractive, challenges can arise both from inflation and from the ability to sustain those rates over time. Taken together, these factors mean that the purchasing power of cash holdings can erode gradually.
This is why maintaining a balanced portfolio that can benefit from growth, income generation, and capital preservation remains essential. This principle will only become more important as both the market and economic cycle continue to evolve.
The bottom line? The first half of 2026 has rewarded investors who stayed diversified and maintained a long-term perspective, even as geopolitical and economic headlines created short-term uncertainty.
References
1. All figures are as of June 30, 2026 and are on a price return basis unless otherwise noted
2. Clearnomics research and LSEG data as of June 30, 2026
3. Ibid.
4. https://gasprices.aaa.com/
5. https://www.bls.gov/news.release/cpi.nr0.htm
6. Clearnomics research and Standard & Poor's data as of June 30, 2026
7. Clearnomics research and FDIC data as of June 30, 2026
Index Descriptions
S&P 500
The Standard & Poor's 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
Dow Jones Industrial Average
The Dow Jones Industrial Average consists of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors.
NASDAQ
The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index.
MSCI Emerging Markets Index
The MSCI EM (Emerging Markets) Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of the emerging market countries of the Americas, Europe, the Middle East, Africa and Asia. The MSCI EM Index consists of the following emerging market country indices: Brazil, Chile, Colombia, Mexico, Peru, Czech Republic, Egypt, Greece, Hungary, Poland, Qatar, Russia, South Africa, Turkey, United Arab Emirates, China, India, Indonesia, Korea, Malaysia, Philippines, Taiwan, and Thailand.
MSCI EAFE Index
The MSCI EAFE Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada. The MSCI EAFE Index consists of the following developed country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the UK.
Bloomberg US Aggregate Bond Index
The Bloomberg U.S. Aggregate Bond Index is an index of the U.S. investment-grade fixed-rate bond market, including both government and corporate bonds.
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