Stocks powered through a turbulent few months to log their best quarter in years. Keeping pace won't be easy.
The largest oil shock in history, worries about the longevity of the artificial-intelligence boom and the prospect of higher interest rates haven't derailed the records. The market overcame those headwinds, thanks to highflying chip stocks that are the biggest AI winners of the moment, as well as confidence that American corporations will continue to churn out higher profits.
Many think those same forces could lift the major indexes for the rest of the year. Thomas Carroll, equity strategist at Stifel, recently raised his price target for the S&P 500 to 7800, up around 4% from Tuesday's closing level.
But Carroll is still expecting more of the same volatility that has interrupted the market's overall climb upward. The S&P 500 has advanced or declined at least 1% during more than one-fourth of this year's trading sessions, according to Dow Jones Market Data.
"It's going to be incredibly volatile, which makes our jobs more fun," he said.
The S&P 500 and the Nasdaq composite rose 15% and 21%, respectively, during the second quarter. It was the best quarter for both since 2020. The Dow Jones Industrial Average had its best quarter since 2022, rising 13%.
The S&P 500 and Nasdaq have notched 24 and 20 record closes in 2026, most recently driven by the artificial-intelligence boom that has fueled eye-popping gains in shares of chip makers supplying the build-out. For the quarter, Micron Technology shares surged 242%, Advanced Micro Devices jumped 186%, Broadcom gained 22% and Nvidia added 15%. The PHLX Semiconductor index climbed 88% to notch its best quarter on record.
The market has defied expectations for some time, but keeping up its breakneck gains would mean overcoming certain challenges. Investors remain skeptical that the billions of dollars funneled into AI will produce blockbuster profits that justify that spending. The rally has left stocks looking historically expensive. And while the U.S. and Iran recently agreed to end fighting around the Strait of Hormuz, where 20% of the world's crude oil once flowed, it is unclear when or if shipping traffic will return to normal.
There is also the prospect of higher interest rates later this year. New Federal Reserve Chairman Kevin Warsh surprised investors in his debut by signaling more concern about inflation than many expected. The war-fueled surge in energy prices helped lift the central bank's preferred inflation gauge to a recent 4.1%, much higher than the Fed's 2% target.
Back in January, investors were still betting the Fed would move to lower rates. That helped push bond yields lower. But the Iran war and the ensuing surge in energy prices upended those expectations. Inflation estimates are once again inching higher, and in recent months yields have climbed to reflect a greater likelihood for rate hikes. Yields rise when bond prices fall.
"There's just a general level of uncertainty right now around what central bank policy looks like across the globe," said Nathan Thooft, chief investment officer of equities and multiasset solutions at Manulife Investment Management. "The Fed is probably the epicenter of that."
The possibility of rising rates has weighed on the prices of precious metals. Gold fell 13% to $4,022.90 a troy ounce over the past three months, marking its biggest quarterly decline since 2013. Silver dropped 20% to $59.48, its worst quarter since 2020.
One thing investors are looking forward to: Some analysts say they expect the stock-market rally to expand beyond tech to include other parts of the economy. Investors view broader gains as a sign of its health as it means that other stocks can keep it going if a few companies stumble.
Investors have already started to look beyond the market's biggest stocks. Both the Russell 2000 index of smaller stocks and the Dow Jones Transportation Average, which tracks 20 large companies ranging from railroads to airlines, notched their best start to the year since 1991. Both are considered barometers for the economy's health.
The Dow industrials closed at its 19th record of the year on Tuesday, and in June outperformed the Nasdaq and S&P 500 by the widest margin since October 2022, according to DJMD. The benchmark index's financials sector has gained 4.2%, healthcare has added 6.5% and industrials have climbed 7.2%, all handily beating communication services' and information technology's more than 3% declines this month.
The Dow rose 0.3%, or around 136 points, on Tuesday. The S&P 500 added 0.8%, while the Nasdaq climbed 1.5%.
While tech companies still account for much of corporate earnings growth, other sectors are catching up. About 85% of companies in the S&P 500 beat first-quarter earnings expectations, the highest percentage since 2021, according to FactSet.
"It's not going to be all about technology going forward," said Saira Malik, chief investment officer at Nuveen.
Analysts see other reasons for optimism.
The price of oil has fallen toward pre-Iran war levels, easing worries that spiking energy prices will push up inflation. Front-month Brent crude futures, the international oil benchmark, fell 38% in their worst quarterly performance since the Covid-19 pandemic. U.S. crude futures declined 31% to $69.50, their worst quarter since 2020.
And earnings growth is expected to remain robust. Companies in the S&P 500 are expected to report a 22% jump in second-quarter profits and see 23% growth for the full year, according to FactSet.
"I would not underestimate the resiliency of the equity market," said Thooft.
Write to Krystal Hur at krystal.hur@wsj.com
(END) Dow Jones Newswires
June 30, 2026 18:11 ET (22:11 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
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