The US stock market rebounded strongly off its first quarter downturn, with the S&P 500 index gaining 14.88% in Q2. A sizzling April (+10.42%) followed by a very strong May (+5.15%) pushed the index to a new all-time high of 7,609.78 on June 2nd before pausing to close the quarter 1.45% off the record high.
Meanwhile, elevated inflation readings drove US Treasury bond yields higher in Q2, with the 10-year rate closing over half a percent higher. Traders quickly went from forecasting multiple interest rate cuts early in the year to betting on rate hikes over the remainder of 2026.
Stock prices rarely rise so rapidly alongside bond market distress, unless the underlying cause of rising rates is an overheating economy. Weak employment data coupled with elevated inflation portrays a slow-growth regime, at best, so it’s fair to ask whether Mr. Market is exhibiting, in the words of the now-late former Federal Reserve Board chairman Alan Greenspan, “irrational exuberance”.
It seems that Wall Street has become comfortable that the Iran conflict is trending toward resolution, mitigating the prospects of war-induced recession. It’s also clear that traders are counting on the AI investment boom to lift corporate profits via massive productivity gains. While the bubble has burst in the stocks of AI hyperscalers like Nvidia, Microsoft, and Oracle, a new bubble has formed as investors continue to load up on shares of chipmakers in a classic ‘picks & shovels’ play. The outperformance of value stocks versus growth stocks over the first half of 2026 also demonstrates optimism that the deployment of AI across all industries will improve profit growth outside of the technology sector. This is the bullish case for stocks.
The bears have their own case which rests on a combination of low consumer confidence readings and stretched investor sentiment based on positioning and elevated margin balances, which have climbed 54% over the last 12 months. Assuming that this borrowed money is fueling the semiconductor sector bubble, the damage will be magnified when that bubble bursts. Powerful trends can persist longer than appears rational, but reversals tend to be sudden and severe.
That the riskiest pockets of the market, small cap stocks (up 21%) and emerging markets stocks (up 24%) are far outpacing the broad market year-to-date is yet another indicator of excessive optimism among investors. Whether this bull market is nearing its end or not requires a crystal ball to ascertain, but all signs point to a market that’s due for another pause in the near term.
Financial Disclosures
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Market data provided by JPMorgan Asset Management and MarketWatch.com.
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.
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