S&P 500, Nasdaq post best quarter since 2020 with 14% gain

The S&P 500 climbed 14% in the second quarter, its best performance since the Covid-era rebound of 2020, as AI momentum and resilient earnings powered equities higher.

"The market has been remarkably resilient in the face of a Middle East conflict that would have triggered a much deeper selloff in prior cycles," said Michael Wilson, chief equity strategist at Morgan Stanley. "AI capital expenditure is the dominant narrative, and until we see evidence of a pullback in spending, the trend remains intact."

The Nasdaq Composite surged more than 21% over the three-month period, also its strongest quarter since mid-2020, while the Dow Jones Industrial Average notched a record high close and posted its biggest quarterly gain since 2022. On the final trading day of the quarter Tuesday, the S&P 500 rose 0.5%, the Nasdaq added 1.1% and the Dow gained 82 points, or 0.2%. Semiconductor stocks led the charge, with Advanced Micro Devices jumping 6.2%, Nvidia rising 1.6% and Intel adding 4%. The VanEck Semiconductor ETF climbed 3%. KLA Corp hit an all-time high of $304, surging 9.4% on the session. The Russell 2000 climbed more than 21% in the first half, its best six-month stretch since 1991, according to CNBC.

The rally faces a test in the second half as traders price in at least one Federal Reserve rate hike by the end of 2026, according to LSEG data. Fed Cleveland President Beth Hammack told CNBC on Tuesday that rate hikes "may still be in the cards" if inflation does not moderate. Corporate earnings projections for the S&P 500 stand at 22% to 25% growth for the full year, and any signs of softening in AI-related capital expenditure could trigger a rotation out of the technology names that have powered the rally.

AI Boom Overrides Geopolitical Risk

The quarter was anything but smooth. Energy prices whipsawed after the outbreak of the U.S.-Iran conflict, with Brent crude touching $119.50 a barrel in March before settling near $73 by quarter-end. A ceasefire agreement between Washington and Tehran reached Sunday — under which both nations paused attacks and reopened the Strait of Hormuz to commercial shipping — helped stabilize oil markets and remove a key source of uncertainty. U.S. crude production rose to a record 13.93 million barrels per day in April, EIA data showed.

Treasury yields climbed alongside equities, with the benchmark 10-year note rising 4 basis points to 4.414% on Tuesday, set for its third straight quarterly advance. The dollar pushed the yen to a 40-year low past 162, while gold slid 11.3% in June alone, heading for its worst quarterly loss in 13 years as rate hike expectations weighed on the precious metal.

Beneath the Surface: Sector Divergence

Despite the headline strength, breadth was mixed. Six of the 11 major S&P 500 sectors ended Tuesday in the red. Real estate was the biggest laggard, dropping 1.5%, hurt by a 5.3% decline in Digital Realty after the data center REIT priced a secondary share offering. Job openings remained surprisingly strong at 7.594 million in May, well above the 7.30 million consensus, while consumer confidence improved less than economists expected — a mixed signal for the economic outlook.

Advancing stocks outnumbered decliners by a narrow 1.12-to-1 ratio on the New York Stock Exchange, with 259 new highs and 116 new lows. On the Nasdaq, 2,491 stocks rose and 2,275 fell.

This article is for informational purposes only and does not constitute investment advice.