The second half of the year is here after a roller-coaster first six months. Here's what investors should watch next.
Tech stocks struggled in the first quarter while oil stocks surged. Their fortunes flipped in the second quarter, and that trend could continue through year-end.
The S&P 500 fell nearly 5% in the first three months of the year while the State Street Energy Select Sector SPDR exchange-traded fund soared 37%, mainly due to worries that higher oil prices triggered by the Iran war could slow the economy and put a dent in earnings for most other companies.
Those fears ultimately didn't materialize. First-quarter earnings for the S&P 500 rose 28.8% from a year ago, led by technology, communication services, and materials companies. And analysts remain bullish about the second quarter. They are forecasting a year-over-year earnings increase of 23.1%, according to FactSet. That's well above the five-year average of 16.4%.
With cease-fire plans leading to an ebbing of the conflict, prices of West Texas Intermediate crude oil have tumbled from a peak of nearly $120 a barrel in early April to a current level of about $70 today. Hence, the pullback for Exxon Mobil, Chevron, and other top oil stocks.
"Energy stocks were weaker than the broad market," said analysts at SentimenTrader in a report Tuesday. "That makes intuitive sense. A large oil drawdown directly pressures revenue, margins, sentiment, and capital spending expectations across the sector."
But fading fears about the Iran war, coupled with renewed enthusiasm for artificial intelligence, have led to strong gains for the technology sector, particularly memory-chip makers and other semiconductor stocks. The State Street Technology Select Sector SPDR ETF is up 32% this year following a nearly 8% drop in the first quarter.
Tech stocks still look reasonably attractive, though not cheap. The technology ETF is trading at 26 times earnings estimates for this year, slightly below its five-year average forward price-earnings ratio of 27.5, according to FactSet.
David Fetherstonhaugh, an investment strategist at VistaShares, thinks that second-quarter results from chip stocks and other Big Tech companies such as Alphabet, Amazon, and Microsoft will help shed light on whether tech's rebound is sustainable.
"The next 30 to 45 days are exceptionally important," Fetherstonhaugh told Barron's. "We got a taste of strong earnings with Micron Technology. We need to see if that plays forward with other chip names like Taiwan Semiconductor and ASML Holding as well as the hyperscalers."
Micron, memory-chip rival SK Hynix, and semiconductor leader Advanced Micro Devices are top holdings in the VistaShares Artificial Intelligence Supercycle ETF.
But don't put all your eggs in the tech basket. The broadening of the rally should continue. Industrials and real estate should also benefit from continued data-center construction. The sectors are key beneficiaries of the infrastructure buildout needed to support artificial intelligence.
The State Street Industrial Select Sector SPDR ETF, which owns Caterpillar and GE Vernova as top holdings, is up 19% this year while the State Street Real Estate Select Sector SPDR ETF is up 10%.
"Demand for AI is skyrocketing -- and capacity can't keep up. The massive AI buildout needs power, data centers, chips, memory, skilled labor, capital and critical materials," said strategists at BlackRock Investment Institute in a midyear report Tuesday.
There's also more to the market than the AI trade. Other parts of the market that fell in the first quarter and bounced back strongly in the second quarter -- such as financials, communication services, and healthcare -- should benefit from a stable economic backdrop. Those sectors are also reasonably valued, trading between 16 and 20 times earnings estimates. Even consumer discretionary stocks, trading at 25 times profit forecasts, are at a discount to their five-year average price/earnings ratio of 27.5.
"I don't see anything that derails economic or earnings growth," said Amanda Agati, chief investment officer at PNC's asset management group.
Meanwhile, energy stocks have tumbled 13% since April. As long as crude prices remain near current levels -- or fall further -- the economy should hold steady. That's good news for most sectors -- but not energy.
Write to Paul R. La Monica at paul.lamonica@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
July 01, 2026 03:30 ET (07:30 GMT)
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