Quarterly Market Commentary

Market Commentary Q2 2026

The second quarter of 2026 delivered one of the most powerful risk-on reversals in modern market history. After the U.S.-Iran conflict drove a sharp first-quarter selloff, markets staged a violent recovery beginning in early April as fears of a prolonged energy crisis gave way to de-escalation, resilient corporate earnings, and renewed enthusiasm for the AI investment cycle. The S&P 500 gained 15.2% for the quarter — its best quarterly performance since the post-pandemic rebound of 2020 — erasing the first quarter's losses and lifting the index to a gain of roughly 10.2% for the first half of the year.

The rally began from a place of deep pessimism — in early April, the Russell 2000 sat marginally below its November 2021 highs, oil hovered near $100 per barrel, and rate cut expectations had been fully priced out. From there, both the market and the macro backdrop improved dramatically. A June U.S.-Iran Memorandum of Understanding reopened the Strait of Hormuz, and Brent crude fell from its quarterly peak near $118 per barrel to roughly $73 by quarter-end, back below pre-conflict levels. The inflationary damage, however, was already done: core PCE inflation reached 3.4% year-over-year in May, its highest reading since 2023. The Federal Reserve — now led by new Chair Kevin Warsh — held its policy rate steady at 3.50%–3.75%, but the June dot plot revealed a decidedly hawkish shift, with the median official now projecting a rate hike in 2026. Markets ended the quarter pricing in two hikes by year-end, a full one-percentage-point swing in expectations from January, when the consensus called for two cuts.

Performance across asset classes reflected the risk-on tone. The advance in equities, initially led by large-cap growth and the hyperscalers, broadened dramatically by quarter-end, with small cap, equal-weight, and value benchmarks all reaching new record highs, while semiconductors stood out on robust AI capital spending. Fixed income produced modest positive returns despite the hawkish repricing: the Bloomberg U.S. Aggregate Bond Index returned +0.7% as Treasury yields across the curve rose modestly. Corporate fundamentals remained the market's foundation, with the S&P 500 expected to report year-over-year earnings growth above 20% — a seventh consecutive quarter of double-digit growth — alongside revenue growth of roughly 12%, the fastest pace since mid-2022.

Looking Ahead to Q3 2026

The setup for the third quarter is constructive but not without risks. Inflation remains well above the Federal Reserve's 2% target, and the possibility of rate hikes — something few investors contemplated at the start of the year — is now a live debate. The U.S.-Iran de-escalation, while encouraging, remains fragile. Beneath the surface, June brought a notable leadership rotation toward industrials, financials, and health care, with the equal-weight S&P 500 breaking out to new highs even as the cap-weighted index consolidated — a signal of healthy, broadening participation. With analysts projecting earnings growth above 20% for the remainder of the year and the AI buildout showing no signs of slowing, we believe the fundamental backdrop remains supportive. Active risk management remains an important focus for navigating what could be a volatile path ahead.

The commentary in this report is not a complete analysis of every material fact in respect to any company, industry, or security. The opinions expressed here are not investment recommendations, but rather opinions that reflect the judgment of Horizon as of the date of the report and are subject to change without notice. Forward-looking statements cannot be guaranteed. We do not intend and will not endeavor to provide notice if or when our opinions or actions change. This document does not constitute an offer to sell or a solicitation of an offer to buy any security or product and may not be relied upon in connection with the purchase or sale of any security or device. There can be economic times where all investments are unfavorable and depreciate in value. All investing involves risk. Clients may lose money.

Equity markets are represented by the S&P 500 Index. The S&P 500 is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies. The Russell 2000 Index is a benchmark that tracks the performance of approximately 2,000 small-cap U.S. companies, providing a broad measure of the small-cap segment of the U.S. equity market. The Bloomberg U.S. Aggregate Bond Index is a broad-based benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market, including Treasuries, government-related and corporate securities, mortgage-backed securities, asset-backed securities and collateralized mortgage-backed securities. References to indices, or other measures of relative market performance over a specified period of time are provided for informational purposes only. Reference to an index does not imply that any account will achieve returns, volatility, or other results similar to that index. The composition of an index may not reflect the manner in which a portfolio is constructed in relation to expected or achieved returns, portfolio guidelines, restrictions, sectors, correlations, concentrations, volatility or tracking error targets, all of which are subject to change. Indices are unmanaged and do not have fees or expense charges, both of which would lower returns. It is not possible to invest directly in an unmanaged index.

This commentary is based on public information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such.

Horizon Investments and the Horizon H are registered trademarks of Horizon Investments, LLC.

Securities and advisory products offered through Principal Securities, Inc., Member SIPC, Member of the Principal Financial Group^®, Des Moines, IA 50392. Horizon Investments, LLC and Ford & Associates Wealth Management are not affiliates of any company of the Principal Financial Group^®. 5793949-082026

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